REG - Paragon Banking Grp - Final Results <Origin Href="QuoteRef">PARA.L</Origin> - Part 2
23/11/2017 07:05
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level of available retained earnings in the
Company, its cash resources and the objective of enhancing shareholder value.
On this basis, the Board is proposing, subject to approval at the Annual General Meeting on 15 February 2018, a final
dividend of 11.0 pence per share which, when added to the interim dividend of 4.7 pence, gives a total dividend of 15.7
pence per share for the year. This represents an increase of 16.3% from 2016, bringing the dividend cover to 2.75 times
(2016: 3.0 times).
Regulatory capital
The Group is subject to supervision by the PRA on a consolidated basis, as a group containing an authorised bank. As part
of this supervision, the regulator will issue individual capital guidance setting an amount of regulatory capital, defined
under the international Basel III rules, implemented through the Capital Requirements Regulation and Directive ('CRD IV'),
which the Group is required to hold relative to its risk weighted assets in order to safeguard depositors in the event of
severe losses being incurred by the Group.
The Group maintains extremely strong capital and leverage ratios, with a capital ratio of 18.7% at 30 September 2017 (2016:
19.0%) and a UK leverage ratio at 6.6% (2016: 6.3%) (note 5) leaving the Group's capital at 30 September 2017 comfortably
in excess of the regulatory requirement. The CET1 ratio, 15.9% at 30 September 2017, remained stable in the period (2016:
15.9%), despite the effect of share buy-backs and dividends, as a result of the Group's profit in the period and the
actuarial gain on the defined benefit pension plan. The Group's medium term CET1 target is 13.0%.
The Group notes the consultation paper issued by the Basel Committee on Banking Supervision ('BCBS') on 15 December 2015
regarding the proposed amendments to the Standardised Approach ('SA') for assessing the capital adequacy of institutions.
The most material proposal for the Group relates to a potential increase in the risk weightings applicable to buy-to-let
lending assets. The Group considers that the proposed risk weightings do not properly reflect the strong credit performance
of the asset class in the UK and has engaged with both the PRA and the BCBS as part of the consultation process. The BCBS
has also issued a consultation paper in March 2016, proposing revisions to the Internal Ratings Basis ('IRB') for assessing
capital, which is based on firms' own internal calculations and subject to supervisory approval. The proposals may serve to
limit the comparative advantage available to IRB users over SA users through the use of floors. Final announcements on the
results of these consultations are still expected and the Group will be closely monitoring developments as they progress.
The Group also notes the steps taken by the PRA towards using its assessment of Pillar 2 capital to ameliorate the
perceived capital advantage of IRB banks over those using the SA, which they regard as distortive to the market. The
regulator published its final policy statement on this in October 2017, and the Group is considering its potential impact.
Notwithstanding the outcome of these consultations, the Group has substantial performance data and excellent credit metrics
to support the adoption of an IRB approach for determining appropriate risk weightings for its buy-to-let mortgage assets.
Other UK institutions currently using an IRB approach for their buy-to-let portfolios achieve materially lower risk
weightings than the 35% required by the present SA, with PRA benchmark figures, most recently updated in October 2017,
being typically in the low to mid-teen percentages.
In addition to the potential capital advantages from adopting the IRB approach, the Group sees broader business benefits
from adopting the disciplines required by IRB as a core part of its risk management structure and it has continued to
progress a project to prepare an application to the PRA to adopt an IRB in future. This will build on the Group's existing
core competencies in credit risk and data handling and should lead to further enhancements in the internal risk governance
framework.
The Group expects to be in a position to apply formally for IRB authorisation for its buy-to-let portfolio in early 2019.
This will be the first portfolio for which authorisation is sought, with further asset classes being added on a phased
basis to achieve the coverage required by the IRB rules.
Gearing and share buy-backs
The Group's reorganisation during the year, coupled with the strong capital base and low leverage in the Company's balance
sheet, provide the opportunity for the business to reduce its over-reliance on equity capital, improving returns for
shareholders. The future requirement to raise debt for liquidity purposes has been reduced by its access to retail deposit
funding and the Group is able to take a long-term view of opportunities available to it in the corporate debt markets to
optimise its funding, working capital and regulatory capital position over time.
At the same time the Company will carefully monitor any excess equity position and consider whether any adjustment is
required, either through further changes in the dividend policy or through share buy-backs.
The reversal of the trend above from equity toward debt is a result of the raising of the 2016 Tier 2 Bond ahead of the
repayment of the £110.0 million Corporate Bond, leading to an element of double funding across the previous year end.
In November 2014 the Group announced a share buy-back programme, which had been extended to £150.0 million by November
2016, and was subsequently extended to £165.0 million in July 2017.
The size of the programme is reviewed periodically to take account of anticipated investment opportunities and the balance
of the Group's debt and equity capital resources. During the year the Group bought back 15.3 million of its ordinary shares
at a cost of £65.5 million (note 25), these shares being held in treasury. The Board intends to extend the programme by up
to £50.0 million in the financial year ending 30 September 2018. These shares will also be initially held in treasury but
may be cancelled subsequently.
The Company currently has the necessary shareholder approval to undertake such share buy-backs and will propose the
appropriate renewal of the relevant authority at its 2018 Annual General Meeting, when a special resolution seeking
authority for the Company to purchase up to 26.5 million of its own shares (10% of the issued share capital excluding
treasury shares) will be put to shareholders.
Capital Outlook
The Board keeps under review the appropriate level of capital for the business to meet its operational requirements and
strategic development objectives. The strength of its business lines, the diversification which has been achieved in the
funding base in recent years and the further opportunities for growth and sustainability opened up by the group
reorganisation, have now created the foundations upon which to develop the Group's next phase of growth.
MANAGEMENT REPORT
FINANCIAL REVIEW
The financial year ended 30 September 2017 saw the Group's underlying profit increase by 1.0% to £145.2 million (30
September 2016: £143.8 million) while on the statutory basis profit before tax increased by 1.1% to £144.8 million (30
September 2016: £143.2 million). Earnings per share increased by 6.4% to 43.1p (30 September 2016: 40.5p).
A3.4.1 Results for the year
CONSOLIDATED RESULTS
For the year ended 30 September 2017
2017 2016
£m £m
Interest receivable 409.2 411.4
Interest payable and similar charges (176.6) (188.2)
Net interest income 232.6 223.2
Net leasing income 3.0 3.0
Other income 17.2 17.8
Total operating income 252.8 244.0
Operating expenses (102.3) (92.5)
Provisions for losses (5.3) (7.7)
145.2 143.8
Fair value net (losses) (0.4) (0.6)
Operating profit being profit on ordinary activities before taxation 144.8 143.2
Tax charge on profit on ordinary activities (27.6) (27.2)
Profit on ordinary activities after taxation 117.2 116.0
2017 2016
Dividend - rate per share for the year 15.7p 13.5p
Basic earnings per share 43.1p 40.5p
Diluted earnings per share 41.9p 39.7p
Total operating income increased by 3.6% to £252.8 million (2016: £244.0 million). Within this, net interest income
increased by 4.2% to £232.6 million from the £223.2 million recorded in the year ended 30 September 2016. The increase
reflects growth in the size of the average loan book, which rose by 5.1% to £10,930.8 million (2016: £10,400.0 million).
Net interest margins ('NIM') in the year ended 30 September 2017 reduced marginally to 2.13% compared to the 2.15% in the
previous year, driven by increased funding costs from the £150.0 million corporate bond issued in 2016, which attracted
interest of £10.9 million in the year, reducing NIM by 0.10%. The Group expects NIM to expand by between 0.05% and 0.10% in
2018.
Other operating income was £20.2 million for the year, compared with £20.8 million in 2016. The reduction principally
results from lower levels of third party servicing income, where previously serviced assets were acquired in the previous
financial year, partly offset by broker income from the Premier business acquired on 30 September 2016.
Operating expenses increased by 10.6% to £102.3 million from £92.5 million reported in the previous year, partly reflecting
the increase in the average number of employees to 1,317, a 5.4% rise (2016: 1,249) and the acquisition of Premier. The
year has also seen significant investments in systems and personnel in order to support the launch of new projects and the
expansion of existing business lines. This resulted in the overall cost:income ratio increasing to 40.5% from 37.9% for the
corresponding period last year, although it remains significantly below the industry average.
The Board remains focused on controlling operating costs through the application of rigorous budgeting and monitoring
procedures. Costs of between £105.0 million and £115.0 million are anticipated for the Group in 2018 and the Group expects
the overall cost:income ratio to improve over time as acquired and start-up operations are integrated into the Group and
it starts to see the benefits of income growth from its new and expanded operations.
The charge of £5.3 million for loan impairment has decreased from that for 2016 (2016: £7.7 million). As a percentage of
average loans to customers the impairment charge remains broadly stable at 0.05% compared to 0.07% in 2016. The Group has
seen favourable trends in arrears performance over the period, both in terms of new cases reducing and customers correcting
past arrears, whilst increasing property values have served to reduce overall exposure to losses on enforcement of
security. The loan books continue to be carefully managed and the credit performance of the buy-to-let book remains
exemplary.
Yield curve movements during the period resulted in hedging instrument fair value net losses of £0.4 million (2016: £0.6
million net losses), which do not affect cash flow. The fair value movements of hedged assets or liabilities are expected
to trend to zero over time, as such this item represents a timing difference. The Group remains economically and
appropriately hedged.
Corporation tax has been charged at the rate of 19.1%, a broadly similar level compared with 19.0% for the previous year.
For the next financial year, Paragon Bank is expected to reach the threshold for the Bank Tax Surcharge and will pay an
additional 8% tax on the excess of its company profit over £25.0 million. This is expected to increase the Group's overall
tax charge.
Profits after taxation of £117.2 million (2016: £116.0 million) have been transferred to shareholders' funds, which
totalled £1,009.4 million at the year end (2016: £969.5 million), representing a tangible net asset value of £3.45 per
share (2016: £3.12) and an unadjusted net asset value of £3.84 per share (2016: £3.50).
3.4.2 Segmental results
Following the group reorganisation in September 2017, the Group now analyses its results between three segments, which are
the principal divisions for which performance is monitored:
· Mortgages, including the Group's buy-to-let, and owner-occupied first and second charge lending and related
activities
· Commercial Lending, including the Group's motor finance and other equipment leasing activities, together with other
offerings targeted towards SME customers
· Idem Capital, including loan assets acquired from third parties and legacy assets which share certain credit
characteristics with them
The Group's central administration and funding costs, principally the costs of service areas, establishment costs, and bond
interest have not been allocated.
Results for the year have been presented on the basis of the new segments and comparative amounts restated accordingly.
The underlying operating profits of these business segments are detailed fully in note 8 and are summarised below.
2017 2016
£m £m
Segmental profit
Mortgages 143.3 133.2
Commercial Lending 14.1 9.0
Idem Capital 75.9 79.0
233.3 221.2
Unallocated central costs (88.1) (77.4)
145.2 143.8
Mortgages
Trading activity during the year in the Mortgages division was very strong, with the segmental profit at £143.3 million, up
7.6% from the previous year (2016: £133.2 million). This increase arose both from increases in the loan book and from
improved funding costs as the business made more use of retail funding.
Commercial Lending
Segmental profit in Commercial Lending increased 56.7% in the year to £14.1 million (2016: £9.0 million) as the asset
finance operation acquired in 2016 contributed a full year's activity to the results. The Premier brokerage business,
acquired on 30 September 2016 also made its first contribution. Loan assets were substantially increased, especially in
motor and asset finance, with the segment's loans to customers increasing 49.0% over the year.
Idem Capital
The Idem Capital division's portfolios continued to perform well in the year to 30 September 2017. However, the level of
new investment was offset by the scale of reductions in the brought forward balance, reducing earnings marginally, which
coupled with the reduction in third party servicing income noted above, reduced segment profit by 3.9% to £75.9 million
(2016: £79.0 million).
A3.4.3 Assets and liabilities
SUMMARY BALANCE SHEET
30 September 2017
2017 2016
£m £m
Intangible assets 104.4 105.5
Investment in customer loans 11,124.1 10,737.5
Derivative financial assets 906.6 1,366.4
Free cash 305.5 383.1
Other cash 1,191.4 854.5
Other assets 50.2 71.4
Total assets 13,682.2 13,518.4
Equity 1,009.4 969.5
Retail deposits 3,615.4 1,873.9
Borrowings 8,927.2 10,502.6
Pension deficit 29.8 58.4
Other liabilities 100.4 114.0
Total equity and liabilities 13,682.2 13,518.4
The Group's loan assets include:
· Buy-to-let and owner-occupied first mortgage assets in the Mortgages segment
· Second charge mortgages, with new originations in Mortgages and purchased and similar legacy assets in Idem Capital
· Other unsecured consumer lending in Idem Capital
· Asset finance and motor finance loans in the Commercial Lending segment
· Development finance loans in the Commercial Lending segment
The allocation of these loan assets between segments is set out below:
2017 2016
£m £m
Mortgages 9,953.9 9,694.7
Commercial Lending 558.8 375.0
Idem Capital 611.4 667.8
11,124.1 10,737.5
An analysis of the Group's financial assets by type is shown in note 16. Movements in the Group's loan asset balances are
discussed in the lending review section.
Movements in derivative financial assets arise principally as a result of the effect of changes in exchange rates on
instruments forming cash flow hedges for the Group's floating rate notes. These movements do not impact on the Group's
results.
Cash flows from the Group's securitisation vehicle companies and the acquired portfolios remain strong. These, together
with debt raisings, financed further investments in loan portfolios, the capital requirements of Paragon Bank and credit
enhancement for mortgage originations. Cash was also utilised in the share buy-back programme, which commenced during
December 2014 and where £166.2 million (including costs) had been deployed by 30 September 2017. Free cash balances were
£305.5 million at 30 September 2017 (2016: £383.1 million) following the repayment of the Group's £110.0 million corporate
bond in the year.
Movements in the Group's funding are discussed in the funding review section.
The accounting value of the deficit in the Group's defined benefit pension plan has reduced significantly over the year
ended 30 September 2017. The triennial valuation of the Plan was completed in the period and the actual experience of the
scheme membership over the three years ended 31 March 2016 was incorporated into the valuation under the International
Accounting Standard ('IAS') 19. Gilt yields also increased over the year and together these resulted in the deficit under
IAS 19 falling to £29.8 million (2016: £58.4 million). A corresponding actuarial gain of £29.0 million before tax was
recognised in other comprehensive income (2016: loss of £37.2 million).
While the valuation under IAS 19 is that which is required to be disclosed in the accounts, pension trustees generally use
the technical provisions basis as provided in the Pensions Act 2004 to measure scheme liabilities. On this basis, the
valuation at the triennial valuation date was £18.0 million and this had reduced to £14.9 million at 30 September 2017,
representing an 87.0% funding level.
MANAGEMENT REPORT
OPERATIONAL REVIEW
A3.5.1 Management and people
The Group has always recognised that its people are its most important asset and are key to its future growth and
development. The learning and development of its employees, together with a rigorous recruitment process are a key part of
the Group's organic growth strategy and underpins the strong progress it has made. It retains its Gold Investor in People
status, reflecting the quality of its internal processes, and during the year has continued to act, by invitation, as an
Investor in People Champion, sharing its experience with other businesses. This places it in the top 1% of companies in the
UK for people development.
The Group prides itself on the fact that its people remain with it for a long time. Its annual employee attrition rate of
13.2% is below the national average and 28.8% of its people have over ten years service, with 9.3% having achieved over 20
years with the Group. We believe this is due to providing quality development opportunities and creating a place where
people want to work, which has meant that knowledge and experience have been retained in each of our specialist areas. We
believe our people are well positioned to support the Group's future growth strategy.
The Group is proud to have signed the Women in Finance Charter, sponsored by HM Treasury, during the year. The Charter's
objectives reflect the Group's own aspirations in the field of gender diversity and the Group published its targets under
the Charter during the year.
The Group is making good progress and will issue its first report under the Charter in January 2018. The Group notes the
publication of the Hampton-Alexander ('HA') review on gender diversity during the year. The Group believes that its Women
in Finance objectives are consistent with the review's recommendation and notes that its proportion of female senior
managers at the year end, as defined by HA, was 31.4% (2016: 29.2%).
The Group has calculated its gender pay gap at April 2017, as required by law. This calculation shows that median female
pay in the Group was 30.4% less than the median male pay. This is broadly in line with the results reported by the few
financial services companies to publish their results so far and narrower than the 33.7% gap for the sector reported by the
Office of National Statistics in their Annual Survey of Hours and Earnings published in October 2017.
The Group will be analysing its gender pay gap data as part of its Women in Finance initiative to determine if there are
areas where urgent action is required, but preliminary results suggest where groups of similar positions exist, there is no
evidence of systematic gender bias on pay.
During the year, as part of the preparations for the Group reorganisation, the Board, initially through the Nomination
Committee, gave in depth consideration to the appropriate Board and governance structure for the reorganised Group. It
concluded that it was appropriate to invite two independent non-executive directors of the Bank, Patrick Newberry and
Finlay Williamson, to join the Board and to appoint two additional non-executive directors, particularly looking to
increase the Board's experience and skills in retail banking and risk, as well as improving the Board's diversity.
As a result, Barbara Ridpath and Graeme Yorston, together with the two Bank directors, joined the Board on 20 September
2017. The four newly appointed directors bring a wealth of experience to the Board, including retail banking experience.
Barbara brings listed PLC experience and a strong financial background as well as experience in operational risk and
financial ethics, having worked for the Federal Reserve Bank of New York, Standard & Poor's and JP Morgan. She is currently
a Director of St Paul's Institute which examines moral and ethical aspects of finance and economics, and a non-executive
director of ORX, a trade association for operational risk professionals.
Graeme is a former Chief Executive of the Principality Building Society, which operates in many of the same markets as the
Group. He has over 43 years experience in the financial services industry and held a number of senior roles with Abbey
National including leading IT, change management and call centre activities. His experience will enhance the Board's
understanding of operational and customer issues in retail banking.
In appointing Patrick Newberry and Finlay Williamson to the Board, their experience of seeing the Bank through its early
development, the launch of its various product lines and the establishment of its relationship with the regulator, is
retained. This will be of great value to the Board in its strategic considerations for future developments. Patrick and
Finlay also have a broad knowledge of the Group's operations which will enable them to contribute strongly to the Board
immediately.
Before joining the Paragon Bank board, Patrick spent 25 years with PricewaterhouseCoopers as a consulting and regulatory
partner, focusing on the financial services industry, adding to the Board's regulatory experience. Finlay is a former
Finance Director of Virgin Money, having previously held a number of senior finance roles in The Royal Bank of Scotland
Group. He brings significant experience of finance, management and accounting in the UK retail banking industry to the
Group.
The Group's succession planning strategy has also been an important area of focus during the year, with all Board and
executive management roles together with their direct reports identified from a leadership and specialist perspective.
Immediate successors are in place for these roles for the short term to provide business continuity and longer term
succession plans are being developed for those with career aspirations and strong potential. This area will remain a
priority for the Board, with the assistance of the Nomination Committee, during the forthcoming year.
A3.5.2 Risk
The effective management of risk is crucial to the achievement of the Group's strategic objectives. It operates a risk
governance framework, designed around a formal three lines of defence model (business areas, Risk and Compliance function
and Internal Audit) supervised at Board level.
The Risk Management framework was reviewed in detail during the year as part of the preparations for the Group's internal
reorganisation. In particular, the Board reviewed its procedure for setting and managing risk appetites, together with the
risk appetites themselves.
The first line of defence has continued to exercise effective control of the risks arising from the Group's operational
activities. Supported by the Risk and Compliance function, further progress has been made in the year by business areas in
embedding the Group's risk management framework, including enhancements to risk event reporting, risk and control
self-assessments and the development of key risk indicators.
The Group has continued to strengthen its second line risk management capabilities including in areas such as cyber
security risk, credit risk modelling and data protection. The Risk and Compliance division now includes dedicated functions
responsible for the oversight of Credit Risk, Property Risk, Compliance and Conduct Risk, Operational Risk, IT and Cyber
Security, and Financial Crime. To progress its objective of obtaining regulatory approval for the implementation of an IRB
approach to credit risk, the Risk and Compliance function also has a Director of IRB and supporting specialist resource.
As part of the Group's reorganisation, the former Group and Bank Risk and Compliance functions were integrated, helping to
remove unnecessary duplication and thereby maximise the effectiveness of the second line of defence.
The principal challenges in the risk environment faced by the Group during the year include:
· The potential impact of the proposals on capital regulation from the BCBS
· Execution and transitional risks arising from the recent major internal reorganisation
· The impact of continuing uncertainty as to the terms on which the UK will leave the EU in March 2019
· The impact of fiscal changes on the demand for buy-to-let mortgages in the UK
· Changes in the regulatory environment relating to the underwriting of buy-to-let mortgages
· Continuing transitional risks arising from the integration and expansion of the acquired Asset Finance business
· Heightened cyber-security risks as a result of the increasing sophistication and frequency of cyber-attacks affecting
the financial services sector
· Major regulatory developments including the implementation of the fourth Money Laundering Directive and the impending
implementation of the General Data Protection Regulation ('GDPR')
The Group continues to closely monitor its exposure to current and emerging risks as they develop and considers itself well
placed to mitigate their impact.
A3.5.3 Regulation
The Bank is authorised by the PRA and regulated by the PRA and the FCA. The Group is subject to consolidated supervision by
the PRA and a number of its subsidiaries are authorised and regulated by the FCA. As a result, current and projected
regulatory changes, particularly revisions to the Basel supervisory regime, continue to pose a significant risk for the
Group. The governance and risk management framework within the Group has therefore been developed to ensure that the
impacts of all new regulatory requirements are clearly understood and mitigated as far as possible. Regular reports on key
regulatory developments are received at both executive and board risk committees.
Whilst the Group is impacted by a broad range of prudential and conduct regulations, given the nature of its operation, the
following are of particular note:
· The PRA completed the implementation of major policy changes to underwriting standards for buy-to-let mortgage
contracts during 2017. These require firms to assess whether the rental income derived from the mortgaged property is
sufficient to support the monthly interest cost of the loan payments using an interest coverage ratio ('ICR') test. In
addition, supplementary underwriting requirements apply for "portfolio landlords" which the PRA has defined as borrowers
with four or more distinct, mortgaged, buy-to-let properties. As a result of its extensive experience within the buy-to-let
sector and its historically conservative approach to underwriting, the Group was able to begin operating in line with the
new requirements well ahead of the regulatory deadline
· In March 2017, the FCA issued a policy statement to complete the consultation process regarding Payment Protection
Insurance ('PPI') that it began in 2015. This included setting a deadline of 29 August 2019 by which consumers will need to
make PPI complaints and new rules and guidance on the handling of PPI complaints. The Group has assessed the operational
and financial implications arising from the policy statement which it does not consider to be material
· The PRA has updated its supervisory statement setting out the approach to strengthening individual accountability in
banking under the Senior Managers Regime ('SMR'). Whilst the Bank has fully implemented the regime, the Group is conscious
of its extension to other Financial Services and Markets Acts firms with effect from 2018. It is therefore taking
appropriate steps to ensure it is able to comply with the requirements
· In June 2017, the PRA published a policy statement on IRB residential mortgage risk weights. This has been
incorporated into the Group's IRB project approach
· In July 2017, the PRA published the results of its review of consumer credit lending, expressing concern that firms'
credit models might not always fully consider a borrower's total indebtedness nor how their ability to repay could be
affected in the future. The Group has reviewed its approach in this area and is confident with the robustness of its
assessment processes and controls
· The GDPR will come into force with effect from May 2018 and represents the most significant revision to data
protection legislation for several decades. The Group is therefore taking appropriate steps to ensure it will be compliant
with the new legislation by the required deadline
Whilst the Group along with the rest of the UK corporate sector does not have clear visibility on potential regulatory
changes that may be introduced following the UK's decision to leave the EU, it does not have any EU passporting issues that
need to be considered.
MANAGEMENT REPORT
CONCLUSION
In recent years Paragon's business model has undergone significant change as it transitioned from a non-bank monoline
lender into a retail funded banking group. A diversification strategy has led to the development of six new lending product
lines within three years and the formation of a bank to establish a deposit funding franchise, which in 2017 saw balances
exceed £3.6 billion. The transition of the model developed further this year with the structural reorganisation, which
effectively saw the Bank re-positioned at the top of the Group subsuming virtually all the business' assets and
liabilities. This structure has provided numerous immediate benefits to the operating model and will improve funding
efficiencies and capital mobility over time. The business is now better positioned to exploit the increasing opportunities
in the UK retail banking market as it structurally shifts in favour of specialist lenders which can display a greater
understanding of the markets, products and customers they serve.
In 2017 Paragon has, alongside this transition, witnessed strong growth across all products with total lending increasing
by 29% to £1.9 billion. Buy-to-let lending benefitted from the increased professionalisation of the sector, a trend that is
expected to continue following further regulatory change. Commercial Lending also experienced strong growth following
investment in technology and distribution in the year. Notwithstanding this growth, and the benign credit environment, the
Group is maintaining a firm discipline on risk and pricing, being cognizant of the potential for more uncertain times
ahead.
With a strong capital base, exemplary asset quality, increasingly diversified funding, and a broadening product range
supported by a more financially efficient operating model, the Group is well positioned to exploit the opportunities and
manage the challenges ahead.
PRINCIPAL RISKS
There are a number of potential risks and uncertainties to which the Group is exposed and which could impact significantly
on its ability to conduct its business successfully. In the opinion of the directors these have not changed materially from
those described in section A2.2 of the last annual report and accounts of the Company for the year ended 30 September 2016.
These are summarised below.
Business Economic The Group could be materially affected by a severe downturn in the UK economy given its income is wholly derived from activities within the UK. This is more difficult to
forecast given current uncertainties on the terms on which the UK will leave the EU in March 2019.This could reduce demand for the Group's loan products, increase the
number of customers that default on their loans and cause security asset values to fall.
Concentration The Group's business plans could be particularly affected by any downturn in the performance of the UK private rented sector and / or further regulatory intervention to
control buy-to-let lending.
Transition Failure to manage major internal reorganisations or integrate acquired businesses safely and effectively could adversely affect the Group's business plans and damage its
reputation.
Credit Customer Failure to target and underwrite credit decisions effectively could result in customers becoming less able to service debt, exposing the Group to unexpected material
losses.
Counterparty Failure of an institution holding the Group's cash deposits or providing hedging facilities for risk mitigation could expose the Group to loss or liquidity issues.
Conduct Fair outcomes Failure to deliver fair outcomes for its customers could impact on the Group's reputation and its financial performance.
Operational People Failure to attract or retain appropriately skilled key employees at all levels could impact upon the Group's ability to deliver its business plans and strategic
objectives.
Systems The inability of the Group's systems to support its business operations effectively and/or guard against cyber security risks could result in reputational damage and
financial loss.
Regulation Given the highly regulated sectors in which the Group operates, compliance failures or failures to respond effectively to new and emerging regulatory and legal
developments could result in reputational damage and financial loss.
Liquidity and Capital Funding If access to funding became restricted, either through market movements or regulatory intervention, this might result in the scaling back or cessation of some business
lines.
Capital Proposals by the BCBS to change capital requirements for lending secured on residential property could have adverse financial implications for the Group.
Market Interest rates Reduction in margins between market lending and borrowing rates or mismatches in the Group balance sheet could impact profits.
Pension Obligation Pensions The obligation to support the Group's defined benefit pension plan might deplete resources.
Pension Obligation
Pensions
The obligation to support the Group's defined benefit pension plan might deplete resources.
The Group has considered and responded to all of these risks, mitigating the exposure as far as is practicable to ensure
that its risk profile remains within the Board's stated risk appetite.
STATEMENT OF DIRECTORS' RESPONSIBILITES
in relation to financial statements
The responsibility statement below has been prepared in connection with the full annual accounts of the Company for the
year ended 30 September 2017. Certain parts of these accounts are not presented within this announcement.
The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable
law and regulations. The directors are required to prepare accounts for the Group in accordance with IFRS and have also
elected to prepare company financial statements in accordance with IFRS. In respect of the financial statements for the
year ended 30 September 2017, company law requires the directors to prepare such financial statements in accordance with
IFRS, the Companies Act 2006 and Article 4 of the IAS Regulation.
International Accounting Standard 1 - 'Presentation of Financial Statements' requires that financial statements present
fairly for each financial year the Company's financial position, financial performance and cash flows. This requires the
faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and
recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's
'Framework for the Preparation and Presentation of Financial Statements'. In virtually all circumstances, a fair
presentation will be achieved by compliance with all applicable IFRS. Directors are also required to:
· Properly select and apply accounting policies
· Make an assessment of the Group's and the Company's ability to continue as a going concern
· Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and
understandable information
· Provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users
to understand the impact of particular transactions, other events and conditions on the entity's financial position and
financial performance
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true
and fair view of the state of affairs of the Group and Company and the Group's profit or loss for the year.
The directors are responsible for keeping adequate accounting records which disclose with reasonable accuracy at any time
the financial position of the Company, for safeguarding the assets, for the Group's system of internal control, as
described in B3.1, and for taking reasonable steps for the prevention and detection of fraud and other irregularities. They
are also responsible for the preparation of a strategic report, directors' report, directors' remuneration report and
corporate governance statement which comply with the applicable requirements of the Companies Act 2006.
The directors are responsible for the maintenance and integrity of the Company's website. Legislation in the UK governing
the preparation and dissemination of financial statements differs from legislation in other jurisdictions.
The directors confirm that, to the best of their knowledge:
· The financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair
view of the assets, liabilities, financial position and profit or loss of the Company and of the Group taken as a whole
· The Directors' Report, including those other sections of the Annual Report incorporated by reference, comprises a
management report for the purposes of the Disclosure and Transparency Rules, which includes a fair review of the
development and performance of the business and the position of the Company and the undertakings included in the
consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face
· The Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for
shareholders to assess the Group's performance, business model and strategy
Approved by the Board of Directors and signed on behalf of the Board.
PANDORA SHARP
Company Secretary
23 November 2017
Board of Directors
R G Dench A K Fletcher P J Newberry
N S Terrington P J N Hartill B A Ridpath
R J Woodman F J Clutterbuck F F Williamson
J A Heron H R Tudor G H Yorston
CONSOLIDATED INCOME STATEMENT
For the year ended 30 September 2017
2017 2017 2016 2016
Note £m £m £m £m
Interest receivable 9 409.2 411.4
Interest payable and similar charges 10 (176.6) (188.2)
Net interest income 232.6 223.2
Other leasing income 14.4 13.0
Related costs (11.4) (10.0)
Net leasing income 3.0 3.0
Other income 11 17.2 17.8
Other operating income 20.2 20.8
Total operating income 252.8 244.0
Operating expenses (102.3) (92.5)
Provisions for losses 17 (5.3) (7.7)
Operating profit before fair value items 145.2 143.8
Fair value net (losses) 12 (0.4) (0.6)
Operating profit being profit on ordinary activities before taxation 144.8 143.2
Tax charge on profit on ordinary activities (27.6) (27.2)
Profit on ordinary activities after taxation for the financial year 117.2 116.0
2017 2016
Note
Earnings per share
- basic 13 43.1p 40.5p
- diluted 13 41.9p 39.7p
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2017
2017 2016
Note £m £m £m £m
Profit for the year 117.2 116.0
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Actuarial gain / (loss) on pension scheme 22 29.0 (37.2)
Tax thereon (5.5) 6.8
23.5 (30.4)
Items that may be reclassified subsequently to profit or loss
Cash flow hedge gains taken to equity 0.5 5.0
Tax thereon (0.1) (1.0)
0.4 4.0
Other comprehensive income for the year net of tax 23.9 (26.4)
Total comprehensive income for the year 141.1 89.6
89.6
CONSOLIDATED BALANCE SHEET
30 September 2017
2017 2016 2015
Note £m £m £m
Assets
Cash - central banks 14 615.0 315.0 286.0
Cash - retail banks 14 881.9 922.6 770.0
Short term investments 15 - 7.1 41.1
Loans to customers 16 11,115.4 10,750.0 10,067.6
Investments in structured entities - - 18.1
Derivative financial assets 18 906.6 1,366.4 660.1
Sundry assets 12.7 12.7 6.2
Property, plant and equipment 46.2 39.2 22.1
Intangible assets 19 104.4 105.4 7.7
Total assets 13,682.2 13,518.4 11,878.9
Liabilities
Short term bank borrowings 0.6 1.2 0.7
Retail deposits 20 3,611.9 1,874.7 708.7
Derivative financial liabilities 18 7.1 15.8 6.7
Asset backed loan notes 21 6,475.8 8,374.1 8,274.6
Secured bank borrowings 21 1,306.0 1,573.0 1,425.4
Retail bond issuance 295.7 295.3 294.9
Corporate bond issuance 149.1 259.0 110.0
Central bank facilities 21 700.0 - -
Sundry liabilities 74.6 78.7 43.1
Current tax liabilities 17.4 16.7 12.5
Deferred tax liabilities 4.8 2.0 11.3
Retirement benefit obligations 22 29.8 58.4 21.5
Total liabilities 12,672.8 12,548.9 10,909.4
Called up share capital 23 281.5 295.9 309.3
Reserves 24 811.0 736.1 760.2
Own shares 25 (83.1) (62.5) (100.0)
Total equity 1,009.4 969.5 969.5
Total liabilities and equity 13,682.2 13,518.4 11,878.9
Approved by the Board of Directors on 23 November 2017.
Signed on behalf of the Board of Directors
N S Terrington R J Woodman
Chief Executive Chief Financial Officer
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 30 September 2017
2017 2016
Note £m £m
Net cash generated by operating activities 27 1,474.7 865.2
Net cash generated / (utilised) by investing activities 28 3.2 (278.6)
Net cash (utilised) by financing activities 29 (1,218.0) (405.5)
Net increase in cash and cash equivalents 259.9 181.1
Opening cash and cash equivalents 1,236.4 1,055.3
Closing cash and cash equivalents 1,496.3 1,236.4
Represented by balances within:
Cash 1,496.9 1,237.6
Short term bank borrowings (0.6) (1.2)
1,496.3 1,236.4
CONSOLIDATED STATEMENT OF MOVEMENT IN EQUITY
For the year ended 30 September 2017
Year ended 30 September 2017
Share capital Share premium Capital redemption reserve Merger reserve Cash flow hedging reserve Profit and loss account Own shares Total equity
£m £m £m £m £m £m £m £m
Transactions arising from
Profit for the year - - - - - 117.2 - 117.2
Other comprehensive income - - - - 0.4 23.5 - 23.9
Total comprehensive income - - - - 0.4 140.7 - 141.1
Transactions with owners
Dividends paid (note 26) - - - - - (38.0) - (38.0)
Shares cancelled (15.0) - 15.0 - - (45.1) 45.1 -
Own shares purchased - - - - - - (69.7) (69.7)
Shares issued to ESOP - - - - - - - -
Exercise of share awards 0.6 0.9 - - - (4.0) 4.0 1.5
Charge for share based remuneration - - - - - 4.2 - 4.2
Tax on share based remuneration - - - - - 0.8 - 0.8
Net movement in equity in the year (14.4) 0.9 15.0 - 0.4 58.6 (20.6) 39.9
Opening equity
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