REG-OneSavings Bank plc : Interim report for the six months ended 30 June 2017 <Origin Href="QuoteRef">OSBO.L</Origin>
24/08/2017 07:05
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OneSavings Bank plc
Interim report for the six months ended 30 June 2017
OneSavings Bank plc ('OSB'), the specialist lending and retail savings group,
announces another strong set of results for the six months ended 30 June 2017.
Financial highlights
* Underlying profit before tax(1) increased 20% to £78.4m (1H 2016:
restated(2) £65.3m)
* Loan book growth of 10%, driven by 26% growth in gross organic origination
to £1,229m (1H 2016: £973m)
* Continued focus on cost discipline and efficiency alongside strong income
growth delivered a cost to income ratio(3) of 28% (1H 2016: restated(2) 26%)
* Net interest margin ('NIM')(4) of 322bps (1H 2016: restated(2) 309bps)
* Loan loss ratio(5) of 4bps (1H 2016: 18bps)
* Fully-loaded Common Equity Tier 1 ('CET1') capital ratio strengthened to
13.7% (FY 2016: 13.3%)
* Total capital ratio strengthened to 17.3% (FY 2016: 15.1%) through issue of
£60m Additional Tier 1 Securities ('AT1 securities') in May 2017
* Return on equity(6 )of 28% (1H 2016: 29%) despite higher average capital
levels
* Interim dividend of 3.5p per share, up 21% (1H 2016: 2.9p)(7)
Commenting on the results, Group CEO Andy Golding, said:
"I am delighted that OneSavings Bank has delivered yet another strong set of
results for the first half of 2017. We continued to successfully navigate
significant regulatory and tax change impacting the Buy-to-Let market in the
first half, delivering 26% growth in total organic origination versus the
first half of 2016. We also generated a 20% growth in underlying profit before
tax and a best in class return on equity of 28%, whilst maintaining our strong
cost discipline and deep understanding of pricing for risk.
We further strengthened our capital base through the issue of £60m of
Additional Tier 1 securities in May 2017. I am delighted with the credit
performance of the book, with a loan loss ratio of 4bps in the first half,
reflecting our robust underwriting standards, lending criteria and sensible
loan to values.
Application levels in our core businesses for the third quarter to date remain
strong and our focus on professional landlords continues to position us well,
with the impact of regulation, including additional requirements for
specialist underwriting from 1 October 2017, expected to further shift
Buy-to-Let activity towards our target market.
Given the current pipeline we expect to deliver net loan book growth of at
least high-teens in 2017, whilst keeping NIM for the full year broadly flat to
2016 and cost to income ratio broadly flat to the first half."
Key metrics
1H 2017 1H 2016
Statutory profit before tax (£m) (*) 78.4 100.0
Total assets (£bn) 7.2 6.3
Net loan book (£bn) 6.5 5.4
Basic EPS (8)(pence) 24.1 30.2
Underlying basic EPS (9)(pence) 24.1 19.7
Loan to deposit ratio (10)(%) 93 85
3 months+ arrears (11 )(%) 1.4 2.1
Customer net promoter score (%) 60 59
* Statutory profit before tax of £100.0m in H1 2016 included a £34.7m
exceptional gain on the sale of the Bank's economic interest in the Rochester
Financing No. 1 plc securitisation vehicle
Enquiries:
OneSavings Bank
plc
Brunswick Group
Alastair Pate, Investor Relations
Robin Wrench/Simone Selzer
t: 01634
838973
t: 020 7404 5959
Results presentation
OneSavings Bank will be holding an interim results presentation for analysts
at 9:30am on Thursday 24 August at The Lincoln Centre, 18 Lincoln's Inn
Fields, WC2A 3ED. The UK dial in is 020 3427 1901 and the passcode is 2268494.
The presentation will be webcast and available from 9.30am on the OneSavings
Bank website at www.osb.co.uk/investor relations/report and accounts.
Registration is open immediately.
About OneSavings Bank plc
OneSavings Bank plc ('OSB') began trading as a bank on 1 February 2011 and was
admitted to the main market of the London Stock Exchange in June 2014 (OSB.L).
OSB joined the FTSE 250 index in June 2015. OSB is a specialist lending and
retail savings group authorised by the Prudential Regulation Authority
('PRA'), part of the Bank of England, and regulated by the Financial Conduct
Authority ('FCA') and PRA.
OSB primarily targets underserved market sub-sectors that offer high growth
potential and attractive risk-adjusted returns in which it can take a leading
position and where it has established expertise, platforms and capabilities.
These include private rented sector Buy-to-Let, commercial and semi-commercial
mortgages, residential development finance, bespoke and specialist residential
lending and secured funding lines. OSB originates organically through
specialist brokers and independent financial advisers. It is differentiated
through its use of high skilled, bespoke underwriting and efficient operating
model.
OSB is predominantly funded by retail savings originated through the
long-established Kent Reliance name, which includes online and postal
channels, as well as a network of branches in the South East of England.
Diversification of funding is currently provided by access to a securitisation
programme, the Funding for Lending Scheme and the Term Funding Scheme, which
OSB joined in 2014 and 2016, respectively.
Notes
(1) Before exceptional items of £nil (1H 2016: £34.7m gain on sale of
economic interest in the Rochester Financing No. 1 plc securitisation vehicle)
(2 )Prior to 2017, OSB deducted coupons on equity Perpetual Subordinated Bonds
('PSBs') accounted for as dividends from underlying profit before and after
tax, net interest margin and cost to income ratio. Following a review of
market practice in advance of the Bank's AT1 issue, OSB no longer deducts
these coupons from the calculation of these key performance indicators. The
comparatives have been restated accordingly (see Financial Review for further
details). Interest payments on AT1 securities classified as dividends will be
treated in the same way.
(3) Administrative expenses, including depreciation and amortisation as a
percentage of total income
(4 )Net interest income as a percentage of average interest bearing assets
including off balance sheet Funding for Lending Scheme (FLS) drawings, on an
annualised basis
(5 )Impairment losses expressed as a percentage of average gross loans and
advances, annualised
(6 )Underlying profit after tax (profit after tax excluding exceptional items
after tax of £nil in the first half of 2017 (1H 2016: £25.7m) and after
deducting coupons on equity PSBs, including the tax effect of £0.4m (1H 2016:
£0.6m) as a percentage of average shareholders' equity (excluding equity PSBs
of £22m and AT1 securities of £60m as at 30 June 2017) of £417.0m in first
half 2017 and £326.3m in first half 2016, on an annualised basis
(7 )The proposed interim dividend of 3.5 pence per share for the first half of
2017 is based on one third of the total 2016 dividend of 10.5 pence per share
(1H 2016: 2.9 pence per share, one third of the 2015 dividend of 8.7 pence per
share)
(8 )Statutory profit after tax attributable to ordinary shareholders
(statutory profit after tax less coupons on equity PSBs) divided by the
weighted average number of ordinary shares in issue
(9) Underlying profit after tax and after deducting coupons on equity PSBs,
including the tax effect of £0.4m (1H 2016: £0.6m) divided by the weighted
average number of ordinary shares in issue
(10 )Excluding the impact of the Bank of England's Funding for Lending and
Term Funding Schemes
(11 )Portfolio arrears rate (excluding legacy problem loan book) of accounts
for which there are missing or overdue payments by more than three months
Non-IFRS performance measures
OneSavings Bank believes that the non-IFRS performance measures included in
this document provide valuable information to the readers as they enable the
reader to identify a more consistent basis for comparing the business'
performance between financial periods, and provide more detail concerning the
elements of performance which the Group is most directly able to influence or
are relevant for an assessment of the Group. They also reflect an important
aspect of the way in which operating targets are defined and performance is
monitored by OneSavings Bank's Board. However, any non-IFRS performance
measures in this document are not a substitute for IFRS measures and readers
should consider the IFRS measures as well. Refer to Alternative performance
measures in the Financial review for further details, reconciliations and
calculations of non-IFRS performance measures included throughout this
document, and the most directly comparable IFRS measures.
Important disclaimer
This document should be read in conjunction with the documents distributed by
OneSavings Bank plc ('OSB') through the Regulatory News Service ('RNS'). This
document contains certain forward-looking statements, beliefs or opinions,
including statements with respect to the business, strategy and plans of OSB
and its current goals and expectations relating to its future financial
condition, performance and results. Such forward-looking statements include,
without limitation, those preceded by, followed by or that include the words
'targets', 'believes', 'estimates', 'expects', 'aims', 'intends', 'will',
'may', 'anticipates', 'projects', 'plans', 'forecasts', 'outlook', 'likely',
'guidance', 'trends', 'future', 'would', 'could', 'should' or similar
expressions or negatives thereof. Statements that are not historical facts,
including statements about OSB's, its directors' and/or management's beliefs
and expectations, are forward-looking statements. By their nature,
forward-looking statements involve risk and uncertainty because they relate to
events and depend upon circumstances that may or may not occur in the future.
Factors that could cause actual business, strategy, plans and/or results
(including but not limited to the payment of dividends) to differ materially
from the plans, objectives, expectations, estimates and intentions expressed
in such forward-looking statements made by OSB or on its behalf include, but
are not limited to: general economic and business conditions in the UK and
internationally; market related trends and developments; fluctuations in
exchange rates, stock markets, inflation, deflation, interest rates and
currencies; policies of the Bank of England, the European Central Bank and
other G8 central banks; the ability to access sufficient sources of capital,
liquidity and funding when required; changes to OSB's credit ratings; the
ability to derive cost savings; changing demographic developments, and
changing customer behaviour, including consumer spending, saving and borrowing
habits; changes in customer preferences; changes to borrower or counterparty
credit quality; instability in the global financial markets, including
Eurozone instability, the potential for countries to exit the European Union
(the "EU") or the Eurozone, and the impact of any sovereign credit rating
downgrade or other sovereign financial issues; technological changes and risks
to cyber security; natural and other disasters, adverse weather and similar
contingencies outside OSB's control; inadequate or failed internal or external
processes, people and systems; terrorist acts and other acts of war or
hostility and responses to those acts; geopolitical, pandemic or other such
events; changes in laws, regulations, taxation, accounting standards or
practices, including as a result of an exit by the UK from the EU; regulatory
capital or liquidity requirements and similar contingencies outside OSB's
control; the policies and actions of governmental or regulatory authorities in
the UK, the EU or elsewhere including the implementation and interpretation of
key legislation and regulation; the ability to attract and retain senior
management and other employees; the extent of any future impairment charges or
write-downs caused by, but not limited to, depressed asset valuations, market
disruptions and illiquid markets; market relating trends and developments;
exposure to regulatory scrutiny, legal proceedings, regulatory investigations
or complaints; changes in competition and pricing environments; the inability
to hedge certain risks economically; the adequacy of loss reserves; the
actions of competitors, including non-bank financial services and lending
companies; and the success of OSB in managing the risks of the foregoing.
No representation or warranty is made that any of these statements or
forecasts will come to pass or that any forecast results will be achieved.
Any forward-looking statements made in this document speak only as of the
date they are made and it should not be assumed that they have been revised or
updated in the light of new information of future events. Except as required
by the Prudential Regulation Authority, the Financial Conduct Authority, the
London Stock Exchange PLC or applicable law, OSB expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained in this document to reflect any change in
OSB's expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based. The information,
statements and opinions contained in this document and subsequent discussion
do not constitute a public offer under any applicable law or an offer to sell
any securities or financial instruments or any advice or recommendation with
respect to such securities or financial instruments.
Key Performance Indicators
For definitions of key ratios please see footnotes above
Strong first half performance
I am pleased to report another strong performance for the first half of 2017,
with continued growth in our earnings and net loan book. We continued to
successfully navigate significant regulatory and tax change impacting the
Buy-to-Let market in the first half, delivering 26% growth in total organic
origination versus the first half of 2016, and driving net loan book growth of
10% in the first half to £6.5bn. This was achieved whilst maintaining our
strong discipline on understanding and pricing for risk, with net interest
margin improving to 322bps, underlying profit before tax up 20% to £78.4m and
underlying basic earnings per share up 22% to 24.1 pence.
Balance sheet growth was achieved whilst delivering a best in class return on
equity of 28% despite holding higher levels of CET1 capital following the sale
of the Rochester Financing No.1 plc securitisation ('Rochester 1 disposal') in
May 2016. The Group's capital position was further strengthened in May 2017 by
the issuance of £60m of Additional Tier 1 Capital ('AT1 securities'). I was
delighted with the positive response to our AT1 issuance, demonstrating the
strength of our balance sheet and investment proposition to debt investors.
Focused cost efficiency, despite additional investment in the business to meet
the growing demands of regulation, continued to drive an excellent cost to
income ratio of 28%.
Continued development of our strong lending franchise
We continue to differentiate ourselves from the competition by offering well
defined propositions in high margin, underserved markets, where we have the
experience and distribution relationships to successfully develop and service
those markets.
The net loan book growth in the period was driven by a 26% increase in gross
organic origination to £1,229m, including a particularly strong increase in
our core Buy-to-Let lending sub-segment, as the market became more focused on
our professional landlord audience during the first half of 2017.
During the first quarter of 2017, we experienced a surge in Buy-to-Let
application volumes as the impact of regulatory changes introducing more
complex underwriting standards took effect. This resulted in temporary
pressure on our service levels which resulted in a short-term negative broker
Net Promoter Score ('NPS') of -7%. We quickly took appropriate actions to
improve turnaround times, and I am pleased that broker NPS is now positive
again with an upward trend.
Mortgage application volumes for the third quarter to date remain strong in
our core products, and for Buy-to-Let, remortgages continue to represent c.60%
of new origination for our Kent Reliance brand. During the first half of 2017,
we have continued to invest in our sales capability. I am particularly proud
that we have continued to win national and broker firm awards throughout the
period, including Best Specialist Lender and Best Business Development
Managers Team from The Mortgage Strategy Awards, demonstrating our commitment
to brokers.
Growth in the overall Buy-to-Let market has slowed in response to tax and
regulatory changes; UK Finance (formerly the Council of Mortgage Lenders) has
forecast that gross advances will fall from £40.6bn in 2016 to £35bn during
2017. In the main, this reduction is a result of the reduced attractiveness of
the sector to the amateur investor, many of whom have entered the market in
recent years. Demand from professional landlords has remained strong and we
expect to see the market continue to professionalise in the near term as the
tax and regulatory changes continue to take effect.
Our proposition has always been targeted towards the professional landlord,
hence these changes have had a positive impact on OSB. Our average market
share of new business increased in the first six months of 2017, given our
specialism and expertise in lending to limited companies and large portfolio
landlords.
Average loan size in our core businesses is c.£250,000, demonstrating that
our loan book primarily consists of standard family homes and smaller flats,
typically subject to sustained high demand.
We saw a reduction in originations in the residential sector in the first half
of 2017 to £131.9m (H1 2016: £172.9m). This was primarily caused by second
charge lending falling to £24.9m from £42.0m in the first half of 2016, as
we allowed our market share to drop where we felt the second charge market was
not pricing fully for risk.
OSB offers a mortgage product transfer scheme ('Choices') to encourage greater
levels of retention amongst those borrowers reaching the end of their initial
product term. Under this programme, borrowers are encouraged to engage with
their broker to receive advice and select from a bespoke product set. Since
the implementation of the scheme in mid-2016, there has been a significant
increase in the number of borrowers choosing a new product within three months
of their initial product ending, driven by success in switching borrowers who
were otherwise remaining on standard variable rate ('SVR') and who, by
definition, were therefore in the market for other lenders.
We continue to innovate products in other sub-sectors, including the launch of
bridging finance through our InterBay brand in the first half. Our Group wide
distribution capability provides us with competitive advantage in launching
new products in these specialist markets.
We remain pleased with the performance of our more cyclical businesses. The
quality of our Heritable residential development finance business pipeline
remains strong, with new applications coming primarily from a mixture of
repeat business from the team's extensive existing relationships and
referrals. We continue to apply the more stringent loan assessment criteria
introduced in 2016, resulting in higher decline rates, but we are seeing
strong loan performance, growth and profitability.
Sustainable funding model with award winning savings
We continue to benefit from our stable and award winning retail funding
franchise with over 9,000 new savings customers joining the Bank in the first
half of 2017, and our retention rates on maturing bonds and ISAs remaining
exceptionally strong at 87%. The strength and fairness of our retail savings
proposition, together with excellent customer service, a quality brand and
high retention rates, continues to allow the Bank to raise significant funds
without needing to price at the very top of the best buy tables, which is
demonstrated by our excellent NPS for customers of 60%.
Whilst remaining committed to our retail savings franchise, we have
complemented it by taking advantage of the government funding schemes; Term
Funding Scheme ('TFS') and Funding for Lending Scheme ('FLS'). Total funding
through these schemes increased by £315m to £941m in the half year to 30
June 2017. Net new retail deposits were up 2% from 31 December 2016 to £6bn.
I am delighted that Kent Reliance has been recognised by Moneyfacts in 2017 as
the Best Cash ISA Provider for the fifth year running. The Bank also received
the ISA Provider of the Year Award from Consumer Moneyfacts for the second
consecutive year. These awards are a testament to our savings proposition and
to the outstanding customer service delivered by our staff.
Operational excellence and service are core to our growth
Our low cost to income ratio of 28% reflects our efficient and scalable
operating platform, and has been achieved despite additional investment in the
business to meet the demands of new regulation. Our overseas operation,
OSBIndia, which undertakes a range of primary processing services at a
significantly lower cost than an equivalent UK-based operation, is a
significant differentiator. OSBIndia service quality remains high, reflected
in our improved and outstanding customer NPS of 60%. We continue to focus on
driving improved customer experience across our savings and lending
franchises.
The Group's IFRS 9 models and first generation internal ratings-based approach
('IRB') models were delivered on schedule in late 2016 and we commenced the
parallel run for IFRS 9 at the start of 2017, positioning us very well to
implement the requirements for 2018.
We continue to develop our business for the future
OSB has a depth of specialist underwriting expertise and continues to exercise
strong diligence over loan assessment through an effective lending policy and
specialist manual underwriting process. The underlying arrears trend is
falling and we remain particularly pleased with the performance of the front
book of mortgages, which has negligible 3 month+ arrears, reflecting our
robust underwriting standards and lending criteria. This helped drive a low
loan loss charge of just 4bps in the first half.
We have continued our focus on disciplined lending in the first half using
criteria and pricing to strengthen the credit mix of new business post the
Brexit referendum. The weighted average loan to value ('LTV') of the mortgage
book remained low at 64% as at 30 June 2017, with an average LTV of 69% on new
origination in the first half. We continue to have minimal exposure to high
end London property with only 2% of our total loan book secured on properties
valued at greater than £2m and with an LTV above 65%. Following regulatory
changes to underwriting standards for Buy-to-Let lending at the start of 2017,
our average interest coverage ratio ('ICR') increased to 190% (FY 2016: 171%).
We have a cautious approach to assessing customer affordability and welcomed
the Buy-to-Let underwriting standards introduced in January which ensure,
inter alia, that lenders reflect the changes to personal tax on landlords
within their affordability assessments. We have always assessed affordability
for borrowers through our specialist underwriting model and we continue to
apply stringent stress tests.
Outlook
Trading conditions in our core businesses remain positive, with strong
application levels for the third quarter to date. We expect full year net loan
book growth driven by organic lending of at least high-teens, NIM broadly flat
to 2016 and cost to income ratio for the full year broadly flat to the first
half.
We are mindful of the macroeconomic environment, primarily driven by
uncertainties surrounding the outcome of Brexit negotiations and the potential
impact on the UK economy, including some easing of house price inflation,
particularly in London. However, we believe that our specialist underwriting
capabilities are even more relevant in times of uncertainty as they give us a
greater and deeper understanding of the risks that we can actively manage and
price for. We manage the business prudently with careful business planning
together with excellent credit risk management, and continue to focus on
achieving risk-adjusted high returns in our chosen markets.
The market sub-segments targeted by OSB, principally professional landlords,
including limited companies, have remained strong despite the overall slowdown
in the Buy-to-Let market so far in 2017. We remain confident in the underlying
strength of the Private Rented Sector. We believe that we are well-placed to
continue to grow market share as the Buy-to-Let market continues to
professionalise and as it reacts to the additional requirements for specialist
underwriting from 1 October 2017.
We will continue to concentrate on what we have proven we do best; using our
relationships, manual underwriting expertise and secured lending strategy to
lend responsibly to customers in underserved markets. We remain well-placed to
take advantage of opportunities that arise using these well proven
capabilities.
Andy Golding
Chief Executive Officer
Business highlights
OneSavings Bank delivered strong earnings and balance sheet growth during the
first half of 2017. The annualised return on equity was 28% (H1 2016: 29%)
despite holding higher levels of CET1 capital following the Rochester 1
disposal in May 2016, and basic earnings per share were 24.1p (H1 2016: 30.2p
including the gain on Rochester 1 disposal) with underlying basic earnings per
share up 22% to 24.1p (H1 2016: 19.7p). The net loan book grew 10% in the
first half to £6,546.6m due to strong new originations, particularly in
Buy-to-Let.
Statutory profit before tax of £78.4m was 22% lower than in the first half of
2016 (H1 2016: £100.0m) due to the exceptional gain of £34.7m on Rochester 1
disposal in May 2016. On an underlying basis, excluding this exceptional gain,
profit before tax increased by 20% to £78.4m (H1 2016: restated(1) £65.3m).
This significant improvement in underlying profitability reflects the strength
of our lending and funding franchises and efficient operating model.
Gross new organic lending of £1,229.2m was up 26% compared to £973.1m in the
first half of 2016. This was due to strong levels of demand for our core
Buy-to-Let products aimed at professional landlords, including limited company
Buy-to-Let, as the impact of regulatory changes introducing more complex
underwriting standards and changes to personal taxation took effect, driving
additional business flow to specialist lenders.
The Bank made no portfolio acquisitions during the first six months of 2017
(H1 2016: portfolios of first and second charge mortgages for £130.7m).
However, we will continue to evaluate selective inorganic opportunities that
provide long-term value and meet our strategic objectives when they arise.
The Bank remained predominantly retail funded during the first half, but
continued to utilise the Bank of England's Funding for Lending ('FLS') scheme
and the Term Funding Scheme ('TFS') drawing down additional net funding of
£315.0m in the first half. The Bank also continued its planned transition out
of FLS into TFS. As at 30 June 2017, TFS drawdowns increased to £551.0m and
FLS reduced to £389.6m (31 December 2016: £101.0m and £524.6m,
respectively).
On 25 May 2017, OSB issued £60m of 9.125% AT1 securities, the proceeds of
which will be used to further optimise the capital stack and to continue to
support the general corporate purposes of the Group, including the growth of
the Group's business.
(1) Restated to exclude coupons on equity PSBs classified as dividends (see
reconciliation in the Financial review below)
Financial review
Summarised financial information, including key ratios, is presented in the
tables below:
First half 2017 First half 2016
Summary Profit or Loss £m £m
Net interest income 117.1 99.1
Fair value losses on financial instruments (5.6) (1.7)
Net fees and commissions 0.3 0.5
External servicing fees (1.0) (1.4)
Administrative expenses (1) (30.6) (25.4)
Regulatory provisions (0.4) (0.9)
Impairment losses (1.4) (4.9)
Exceptional gain on sale - 34.7
Profit before tax 78.4 100.0
Profit after tax 59.0 74.1
Underlying profit before tax 78.4 65.3 (2)
Underlying profit after tax 59.0 48.4 (2)
First half 2017 First half 2016
Key ratios
Net interest margin 322bps 309bps (2)
Basic earnings per share, pence 24.1 30.2
Underlying basic earnings per share, pence 24.1 19.7
Return on equity 28% 29%
Management expense ratio (3), annualised 89bps 83bps
Cost to income ratio 28% 26% (2)
Loan loss ratio 4bps 18bps
30-Jun-17 31-Dec-16
£m £m
Extracts from the Statement of Financial Position
Loans and advances 6,546.6 5,939.2
Retail deposits 6,047.0 5,952.4
Total assets 7,213.0 6,580.9
Key ratios
Liquidity ratio (4) 14.9% 17.9%
Common equity tier 1 ratio 13.7% 13.3%
Total capital ratio 17.3% 15.1%
Total leverage ratio 6.5% 5.5%
(1 )Including depreciation and amortisation
(2 )Restated to exclude coupons on equity PSBs classified as dividends (see
reconciliation below)
(3 )Administrative expenses including depreciation and amortisation as a
percentage of average total assets
(4 )Liquid assets as a percentage of funding liabilities
For definitions of other key ratios please see footnotes above
Restated key ratios
The following tables show the impact of removing the deduction of coupons on
equity PSBs classified as dividends from the calculation of net interest
income in certain key ratios from 2017 in line with market practice.
Change in key ratio calculation
Cost to income ratio First half 2017 % First half 2016 %
Previous method 28 27
Add back coupons on equity PSBs (0) (1)
Current method 28 26
Net interest margin
Previous method 3.20 3.07
Add back coupons on equity PSBs 0.02 0.02
Current method 3.22 3.09
Underlying profit before tax First half 2017 £m First half 2016 £m
Previous method 77.9 64.6
Add back coupons on equity PSBs 0.5 0.7
Current method 78.4 65.3
Underlying profit after tax
Previous method 58.6 47.8
Add back coupons on equity PSBs 0.4 0.6
Current method 59.0 48.4
Alternative performance measures
OSB believes that the use of alternative performance measures ('APMs') for
profitability and earnings per share provide valuable information to the
readers of the financial statements and present a more consistent basis for
comparing the Group's performance between financial periods, by adjusting for
exceptional non-recurring items. APMs also reflect an important aspect of the
way in which operating targets are defined and performance is monitored by the
Board. However, any APMs in this document are not a substitute for IFRS
measures and readers should consider the IFRS measures as well. Prior to 2017,
OSB deducted coupons on equity PSBs accounted for as dividends from underlying
profit before and after tax. Following a review of market practice in advance
of the Bank's AT1 issue, OSB will no longer deduct these coupons and
underlying profit before and after tax for the first half of 2016 have been
restated throughout this document accordingly.
Reconciliation of statutory profit to underlying profit
Profit before tax Profit after tax
First half 2017 £m Restated First half 2016 £m First half 2017 £m Restated First half 2016 £m
Statutory profit 78.4 100.0 59.0 74.1
Exceptional gain on Rochester 1 disposal - (34.7) - (25.7)
Underlying profit 78.4 65.3 59.0 48.4
Strong profit growth
The Group reported strong profitability in the first half of 2017 with profit
before tax of £78.4m (H1 2016: £100.0m, including the exceptional gain of
£34.7m on the Rochester 1 disposal). Excluding the exceptional gain on the
Rochester 1 disposal in 2016, underlying profit before tax for the first six
months of 2017 was up 20% at £78.4m (H1 2016: restated £65.3m) primarily
reflecting strong balance sheet growth and net interest income.
Profit after tax for the first half of 2017 was £59.0m (H1 2016: £74.1m,
including £25.7m after tax exceptional gain on the Rochester 1 disposal).
Underlying profit after tax, excluding the exceptional gain in 2016, increased
by 22% to £59.0m (H1 2016: restated £48.4m). The Bank's effective tax rate
fell to 24.7% for the first half of 2017 (H1 2016: 25.9%) due to a reduction
in the rate of corporation tax from 20% to 19% effective 1 April 2017 and a
reduction in the proportion of Group profits subject to the Bank Corporation
Tax Surcharge.
Net interest margin (NIM)
The Group reported an increase in net interest income of 18% to £117.1m in
the first half of 2017 (H1 2016: £99.1m) and NIM of 322bps (H1 2016: restated
309bps). The higher NIM reflected a reduced cost of retail funds and
additional benefit from TFS, more than offsetting the roll-off of higher
yielding acquired loan books.
Fair value losses on financial instruments
Fair value losses on financial instruments in the first half of 2017 were
£5.6m (2016: £1.7m). The increase was due to accelerated amortisation of
fair value adjustments on hedged assets relating to cancelled swaps of £6.2m
(2016: £1.6m). The Group started to accelerate the amortisation in-line with
the roll-off of the underlying legacy long-dated fixed rate mortgages in the
second half of 2016.
Net fees and commissions
Net fees and commissions income of £0.3m in first half of 2017 (H1 2016:
£0.5m) comprised fees and commissions receivable of £0.8m (H1 2016: £0.9m)
offset by fees and commissions payable of £0.5m (2016: £0.4m). Fees and
commissions receivable include arrangement fees on funding lines and master
servicing fees. Fees and commissions payable include branch agency fees and
commission paid to the Kent Reliance Provident Society for conducting member
engagement activities for the Bank.
External servicing fees
External servicing fees decreased to £1.0m in the first half of 2017 (H1
2016: £1.4m) mainly due to the Rochester 1 disposal in May 2016 and the
run-off of certain other acquired portfolios.
Efficient and scalable operating platform
Administrative expenses, including depreciation, were up 20% to £30.6m for
the first half of 2017 (H1 2016: £25.4m) largely due to increased staff costs
in-line with growth in the business and the increased cost of meeting new
regulation.
The Group's annualised management expense ratio was up 6bps to 0.89% for the
first half of 2017 (H1 2016: 0.83%) and cost to income ratio increased to 28%
(H1 2016: restated 26%) reflecting these additional costs. Both ratios
continue to reflect the benefit of the Bank's efficient and scalable low cost
back office based in Bangalore, India.
Regulatory provisions
Regulatory provisions expense, which is primarily in respect of the Financial
Services Compensation Scheme ('FSCS') levies continued to fall to £0.4m for
the first half of 2017 (H1 2016: £0.9m) based on lower estimates published in
the FSCS outlook for the current period and reduced final costs for the prior
year. This includes the full annual charge recognised on 1 April in each year,
based on retail savings balances as at the previous 31 December.
Impairment losses
Impairment losses decreased to £1.4m in the first half of 2017 (H1 2016:
£4.9m) representing a loan loss ratio of 4bps on average gross loans and
advances on an annualised basis (H1 2016: 18bps). In June 2016, the Group
applied additional conservatism to collectively assessed impairment
assumptions as a prudent measure in response to increased macroeconomic
uncertainty post the UK referendum vote to leave the European Union. This
increased loan losses across the acquired residential portfolios in the first
six months of 2016. In addition, the reduction in impairment losses was driven
by lower underlying loan losses on acquired residential portfolios, and the
effect of increasing property values reducing potential loss.
The performance of the front book of mortgages remains strong, reflecting the
continued strength of the Bank's underwriting and lending criteria. From more
than 33,500 loans totalling £7.0bn organically originated since the creation
of the Bank in February 2011, only 122 were more than three months in arrears
as at 30 June 2017, with a total value of £20.6m and an average LTV of just
61%.
Exceptional items
There were no exceptional items in the first half of 2017. Exceptional income
in the first half of 2016 of £34.7m comprised of the gain on disposal of the
Bank's entire economic interest in the Rochester 1 securitisation vehicle.
Dividends
The Group's dividend policy is to declare interim dividends based on one third
of the prior year's total dividend. To that end, the Board has declared an
interim dividend of 3.5 pence per share for first half of 2017, based on the
2016 full year dividend of 10.5 pence per share. The Board continues to target
a full year dividend pay-out ratio of at least 25 per cent of underlying
profit after tax less coupons on equity PSBs and AT1 securities classified as
dividends.
Balance sheet growth
Loans and advances grew by 10% in the first half of 2017 to £6,546.6m (31
December 2016: £5,939.2m). This growth was funded by a mixture of retail
deposits which increased by 2% to £6,047.0m (31 December 2016: £5,952.4m)
and net new drawings under the TFS. The Bank drew down £315.0m of additional
net new funding from the Bank of England in the first half of 2017. In
addition, OSB continued with its planned transition out of FLS into TFS. The
Bank had total borrowings of £389.6m under the FLS and £551.0m under the TFS
as at 30 June 2017 (31 December 2016: £524.6m and £101.0m, respectively).
Liquidity
OneSavings Bank operates under the PRA's liquidity regime. The Bank operates
within a target liquidity runway in excess of the minimum regulatory
requirement. OSB ended the first six months of 2017 with a liquidity ratio of
14.9% (31 December 2016: 17.9%) following a recalibration of the Group's
liquidity runway. The Bank's liquidity coverage ratio of 189% as at 30 June
2017, including off-balance sheet FLS drawdowns, is significantly in excess of
the regulatory minimum of 90%.
The Bank's retail savings franchise continues to provide the business with
long-term sustainable funding for balance sheet growth as evidenced in the
first half of 2017 by the continued strong retention rate for maturing
deposits of 87% and an exceptional level of customer satisfaction with a Net
Promoter Score of 60%.
Capital
The Bank's capital position continued to strengthen in the first half through
organic capital generation, with a fully-loaded CET1 ratio of 13.7% as at 30
June 2017 (31 December 2016: 13.3%).
In the first half of 2017, the Bank further strengthened its capital position
by issuing £60m of AT1 securities which drove an increase of 2.2 percentage
points in the total capital ratio to 17.3% (31 December 2016: 15.1%) and an
increase of a percentage point in the leverage ratio to 6.5% (31 December
2016: 5.5%).
The Bank had a Pillar 2a requirement of 1.2% of risk weighted assets as at 30
June 2017 and 31 December 2016.
Segmental review
The following table shows the Group's loans and advances and contribution to
profit by segment:
First half 2017, £m Total BTL/SME (1) Residential mortgages
Net interest income 117.1 83.4 33.7
Other expense (6.3) (1.4) (4.9)
Total income 110.8 82.0 28.8
Impairment (losses)/credit (1.4) (1.5) 0.1
Contribution to profit 109.4 80.5 28.9
First half 2016, £m
Net interest income 99.1 62.8 36.3
Other expense (2.6) (0.7) (1.9)
Total income 96.5 62.1 34.4
Impairment losses (4.9) (0.7) (4.2)
Contribution to profit 91.6 61.4 30.2
As at 30 June 2017, £m Total BTL/SME (1) Residential mortgages
Gross loans to customers 6,569.2 4,801.5 1,767.7
Provision for impairment losses (22.6) (15.6) (7.0)
Net loans to customers 6,546.6 4,785.9 1,760.7
Risk weighted assets 2,990.9 2,242.0 748.9
As at 31 December 2016, £m
Gross loans to customers 5,964.2 4,104.3 1,859.9
Provision for impairment losses (25.0) (17.2) (7.8)
Net loans to customers 5,939.2 4,087.1 1,852.1
Risk weighted assets 2,743.0 1,944.3 798.7
(1) The personal loan portfolio has largely completed its run-off and is
therefore no longer considered as a separate segment by the Group. The
remaining net loan book of £2.3m (31 December 2016: £9.1m) and negative
contribution to profit for the period of £0.7m (H1 2016: contribution to
profit of £1.5m) have been reported in the Buy-to-Let/SME segment with
comparatives restated accordingly.
Buy-to-Let/SME
Buy-to-Let/SME sub-segments: gross loans
30-Jun-17 £m 31-Dec-16 £m
Buy-to-Let 4,266.8 3,613.3
Commercial 302.9 268.3
Residential development 151.3 141.6
Funding lines 77.9 71.7
Personal loans (1) 2.6 9.4
Total 4,801.5 4,104.3
(1 )See footnote above
This segment comprises secured lending on property for investment and
commercial purposes.
According to UK Finance (formerly the Council for Mortgage Lenders), gross
Buy-to-Let advances stood at £17.3bn in the first six months of 2017, down
24% on the same period in 2016, albeit that period was inflated by a spike in
purchases arising from the implementation of the 3% Stamp Duty Land Tax
surcharge on second properties from 1 April 2016. UK Finance currently
forecast gross Buy-to-Let advances to reach £35bn in 2017, compared to
£40.6bn in 2016. The regulatory and taxation changes that largely drove this
decrease have led to heightened demand from professional landlords, including
limited companies, for OSB's specialist capabilities and expertise leading to
growth in our market share of new lending in the first six months of 2017.
Against this backdrop, OSB has delivered strong growth, evidenced by
significantly higher originations in the Buy-to-Let/SME segment, up 37% at
£1,097.3m for the first half of 2017, compared to £800.2m in the first half
of 2016.
The Buy-to-Let sub-segment loan portfolio grew by £653.4m in the first half
of 2017 to a gross value of £4,266.8m (31 December 2016: £3,613.3m) as we
benefited from the strong levels of organic origination. Following the
regulatory changes to underwriting standards for Buy-to-Let lending at the
start of 2017, our average interest coverage ratio increased to 190% (FY 2016:
171%).
Our exposure to commercial real estate is limited, at a gross value of
£302.9m as at 30 June 2017 (31 December 2016: £268.3m) and the portfolio has
a low weighted average LTV of 61% and average loan size of £295,000.
In 2014, the Bank launched Heritable Development Finance, to provide prudent
development finance to smaller residential developers, with a preference for
forging relationships with those active outside of the prime central London
market. The business continues to grow in spite of new entrants to the market,
as customers seek an experienced and knowledgeable lender. However, following
the UK vote to leave the EU, the number of potential development schemes which
can withstand our stringent stress testing has reduced. The residential
development funding gross loan book at the end of the first half of 2017 was
£151.3m, with a further £76.5m committed (31 December 2016: £141.6m and
£70.0m respectively).
In addition, the Bank continued to provide secured funding lines to non-bank
lenders which operate in certain high-yielding, specialist sub-segments, such
as bridging finance and asset finance. Total credit approved limits as at 30
June 2017 were £313.0m with total loans outstanding of £77.9m (31 December
2016: £244.0m and £71.7m respectively). During the period, three new funding
lines were approved and are in the documentation process. The pipeline remains
robust, however following the UK's vote to leave the EU, a more cautious risk
approach has been adopted.
OSB's combined Buy-to-Let/SME loan portfolio(1) grew 17% during the first half
of 2017, ending the period with a net carrying value of £4,785.9m (31
December 2016: restated £4,087.1m(1)). The average loan to value ('LTV')
remained low at 69% (31 December 2016: 69%) with 1% of loans by value with an
LTV exceeding 90% (31 December 2016: 0.4%). The average LTV of new
Buy-to-Let/SME origination in the first half of 2017 was 70% (H1 2016: 74%).
The Buy-to-Let/SME segment made a contribution to Group profit(1) of £80.5m
in the first half of 2017, up 31% compared to £61.4m in the first half of
2016, primarily reflecting the positive impact of new lending and the falling
cost of funds.
(1 )Includes the remaining personal loan portfolio.
Residential mortgages
Residential sub-segments: gross loans
30-Jun-17 £m 31-Dec-16 £m
First charge 1,297.1 1,322.1
Second charge 455.3 487.2
Funding lines 15.3 50.6
Total 1,767.7 1,859.9
This segment comprises lending to customers who live in their own homes,
secured via either first or second charges against the residential home.
During the first half of 2017, the Group organically originated residential
lending of £131.9m (H1 2016: £172.9m). This included first charge
residential lending in the UK, predominantly in London and the South-East,
through the Kent Reliance brand as well as second charge lending through the
Prestige Finance brand. The Bank made no portfolio acquisitions in the first
half of 2017 (H1 2016: portfolios of first and second charge residential
mortgages for £130.7m).
Our first charge residential book had a gross value of £1,297.1m as at 30
June 2017 (31 December 2016: £1,322.1m) with new organic lending in the first
half of 2017 offset by redemptions on the back book and acquired mortgage
portfolios in run-off.
The second charge residential loan book reduced by 7% as at 30 June 2017 with
a gross value of £455.3m (31 December 2016: £487.2m) with organic
origination more than offset by redemptions on the organic book and acquired
books in run-off. We continue to maintain appropriate pricing for risk in the
second charge residential market which has seen downward pricing pressure as a
result of new entrants and an increase in competition.
OSB continued to provide secured funding lines to non-bank lenders which
operate in certain high-yielding, specialist sub-segments, such as residential
bridge finance. The Bank has adopted a more cautious approach in our more
cyclical businesses following the EU referendum. Total credit approved limits
as at 30 June 2017 were £35.1m with total loans outstanding of £15.3m (31
December 2016: £86.2m and £50.6m respectively). During the period, one
facility of £34.4m matured.
OSB's total residential loan portfolio had a net carrying value of £1,760.7m
as at 30 June 2017 (31 December 2016: £1,852.1m). The average LTV remained
low at 58% (31 December 2016: 58%) with only 2% of loans by value with LTV's
exceeding 90% (31 December 2016: 3%). The average LTV of new residential
origination in the first half of 2017 was 66% (H1 2016: 65%).
Residential mortgages made a contribution to Group profit of £28.9m in the
first half of 2017, down 4% compared to £30.2m in the first half 2016,
following the disposal of higher yielding mortgages in Rochester 1 in May 2016
and accelerated amortisation of hedged assets relating to cancelled swaps in
the first half of 2017, partially offset by the impact of lower loan losses.
The Bank increased prudency in collective provision assumptions in the first
half of 2016, following the UK vote to leave the EU, which particularly
impacted acquired second charge mortgages.
Risk Management Report
Progress made during the six months to 30 June 2017
During the half year to 30 June 2017 the Group made strong progress against
its strategic risk management objectives for the year.
Key highlights included the delivery of enhanced risk appetite statements for
2017, further embedding the risk appetite framework whilst enhancing
governance arrangements in relation to the oversight, review and challenge of
proposed limits and thresholds, coupled with improvements in stress testing
and scenario analysis across all risk types.
The IFRS 9 programme continued to progress to plan, with the Group running
parallel impairment calculations throughout the period. An independent model
validation review was conducted via an independent third party, reviewing the
underlying models, implementation standards and governance arrangements in
place which confirmed that the Group is well-positioned to meet the
requirements for adoption at January 2018. The Group has prioritised
integration of the IFRS 9 capability into other core risk processes including
risk appetite, future loss forecasting, stress testing and the Internal
Capital Adequacy Assessment Process ('ICAAP') as a key priority for the second
half of 2017.
Progression to an Internal Ratings Based ('IRB') approach for calculating
credit risk capital requirements remains a key strategic initiative, building
on the development of the Group's first generation IRB models and rating
engine which completed during December 2016; the Group ran IRB capital
calculations in parallel throughout the period to 30 June 2017. Good progress
has also been made in relation to building out a robust road map to the
Group's IRB waiver application, via the completion of an internal
self-assessment against the Capital Requirements Regulation articles and wider
application requirements.
A strategic data management programme has been mobilised to oversee tactical
and strategic enhancements being made to the Group's data management and
governance capabilities. External third party data was acquired to underpin
enhanced analytics across the credit and operational risk types, also allowing
the Group to benchmark stress testing activity.
Enhanced stress testing and scenario analysis capabilities were developed and
implemented during the period, to support the Group's delivery of key
regulatory submissions including the ICAAP and the Internal Liquidity
Assessment Process ('ILAAP').
The Group continued to make significant investment in people across the Risk
and Compliance function ensuring there is sufficient capacity to deliver the
strategic risk enhancements planned for the second half of the year and
beyond.
Principal risks and uncertainties
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.
There has not been a material change in the Group's business strategy, risk
management framework or risk appetite during the six months to 30 June 2017.
In the opinion of the Directors, the key principal risks have not changed
materially from the overview provided in the 2016 Annual Report and Accounts.
The table below details, at a high level, the principal risks which the Board
believes are the most material with respect to potential adverse movements
impacting the business model, future financial performance, solvency and
liquidity. A more detailed review of the Group's principal risks and
uncertainties is detailed within the Chief Risk Officer's Report in the 2016
Annual Report and Accounts on pages 42 to 45, which can be accessed via our
website at www.osb.co.uk.
Principal risks Key mitigating actions
Strategic and business risk * Regular monitoring of the Group's strategic and business performance against market commitments, and the balanced business scorecard and risk appetite by the Board and the Executive Committee.
* The Group also extensively uses stress testing to flex core business planning assumptions to assess potential performance under stressed operating conditions.
Reputational risk * Established processes are in place to proactively identify and manage potential sources of reputational risk.
Credit risk Individual borrower defaults * All loans are extended via thorough bespoke and expert underwriting to ensure the ability and propensity of borrowers to repay is appropriate, whilst sufficient security is in place in case an account defaults.
* Should there be problems with a loan, the collections and recoveries team works with customers unable to meet their loan servicing obligations to reach a satisfactory conclusion while adhering to the principle of treating customers fairly.
* Our strategic focus on lending to professional laRecent news on Osb
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