REG - Paragon Banking Grp - Final Results
07/12/2021 07:00
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RNS Number : 7557U Paragon Banking Group PLC 07 December 2021
RNS Announcement
Paragon Banking Group PLC
7 December 2021
Record profits underpinned by strong lending and margin growth
Paragon Banking Group PLC ('Paragon' or 'the Group'), the specialist lender
and banking group, today announces its full year results for the year ended 30
September 2021
Nigel Terrington, Chief Executive of Paragon said:
"We have delivered an outstanding performance in 2021, which is testament to
the strength of our operating model, the quality of our customer base and the
capability and adaptability of our people.
"Every lending business in the Group has this year made excellent progress,
and at over £2.6 billion, aggregate new lending now comfortably exceeds
pre-pandemic levels. We have made huge strides on the funding side, growing
retail deposits by 18.4% at attractive rates, and have delivered significant
digital improvements as part of the Group's cloud-based strategy.
"We delivered strong earnings growth with a 62% increase in profits to £194
million, an 81.1% increase in earnings per share and a total dividend for the
year of 26.1 pence. This performance allowed us to return an additional £38
million through a buyback, and we still ended the year with stronger capital
ratios, including CET1 at 15.4%.
"These results validate our longstanding strategy to concentrate on specialist
lending markets where we add value for our customers with complex
requirements.
"We enter 2022 with strong pipelines at near record levels, improved margins
and the capital to continue to invest in and grow our business, as well as
deliver additional returns for shareholders via a new buyback programme and
materially increasing our full year dividend. We remain confident in our
outlook and are on track with our plans to become the UK's leading
technology-enabled specialist bank."
Financial highlights
· Underlying profit increased by 61.8% to £194.2 million (2020:
£120.0 million)
· Statutory profit before tax increased by 80.5% to £213.7 million
(2020: £118.4 million)
· Impairment coverage reduced to 49 basis points reflecting strong
credit performance (2020: 64 basis points). Model overlays broadly maintained
· Reported EPS up 81.1% to 65.2p (2020: 36.0p), underlying EPS up 62.5%
to 59.3p (2020: 36.5p)
· Full year dividend of 26.1p (2020: 14.4p)
· Capital ratios remain strong after accruing for the dividend; CET1
ratio at 15.4% (30 September 2020: 14.3%)
· Net interest margin of 239 basis points up from 224 basis points in
2020
· Return on Tangible Equity increased to 16.2% on a statutory basis,
14.7% on an underlying basis
· 2022 share buyback of up to £50 million announced (in addition to
remaining £2.2 million from the 2021 buyback)
Operational highlights
· Excellent operational capability sustained throughout the pandemic,
delivering record new lending volumes and new delivery systems
· Strong lending growth in core divisions:
o Mortgage Lending advances up 29.4% to £1.63 billion, year-end buy-to-let
pipeline exceeds £1 billion
o Commercial Lending advances up 22.9% to £0.97 billion, year-end
development finance pipeline up 63.2% to £0.37 billion
· Retail deposits grew 18.4% to £9.3 billion (2020: £7.9 billion) at
attractive rates
· Accessed £2.75 billion under the SME Term Funding Scheme ('TFSME')
by 30 September 2021
· First UK Green Tier-2 bond issued
· LIBOR transition successfully delivered
· Phase 2 of IRB application ongoing, good progress made
For further information, please contact:
Paragon Banking Group PLC Headland Consultancy
Nigel Terrington, Chief Executive paragon@headlandconsultancy.com
Richard Woodman, Chief Financial Officer Lucy Legh/Del Jones
0121 712 2505 020 3805 4822
The Group will be holding a call for sell-side analysts on 7 December 2021 at
9:30am, a recording of which will be available on the Group's website at
www.paragonbankinggroup.co.uk/investors
(http://www.paragonbankinggroup.co.uk/investors) from 2:30pm that day. The
presentation material will be available on the website from 7:00am on the
same day.
Cautionary statement
Your attention is drawn to the cautionary statement set out at the end of this
document.
Introduction
The Group has delivered record profits and an outstanding operational
performance reflecting the strength of its franchise, the resilience of its
operating platform and the commitment and professionalism of its people.
The Group's business model has been designed, using its extensive
through-the-cycle experience, to be resilient in its operational performance
and to maintain a strong balance sheet. Having developed an effective working
approach at the onset of the crisis, the business was well placed to deal with
the changing Covid conditions, particularly over the winter months,
maintaining new business activities and paying close attention to the needs of
our customers, employees and business partners as the situation developed.
This testing period brought out the best in our people and has given us the
opportunity to demonstrate the strong fundamentals of the Group as we continue
to generate improved returns and higher growth rates.
Despite the operational challenges the lockdowns brought, we have strengthened
our franchise by building stronger relationships with customers,
intermediaries and other business partners. Alongside this, we have delivered
a number of key technology developments during the year. We also have an
active change programme in progress, designed to optimise customer journeys,
operational efficiencies and data and control needs across the business. The
delivery of these, together with accessing the capacity and efficiencies they
bring, will form a core part of our strategy in continuing to drive strong
growth in a prudent manner in the UK's specialist financial services markets.
Financial performance
The Group delivered a strong financial performance reflecting the improvements
in the UK economy and strong underlying trading. A combination of strong loan
growth, improving net interest margins, tight cost control and a reversal of
some of the Covid-related impairments enabled underlying profits to increase
by 61.8% to £194.2 million.
Impairments for expected credit losses fell materially from their 2020 level,
ending 2021 with a £4.7 million write-back compared to the £48.3 million
charge in 2020. Notwithstanding this impairment volatility, pre-provision
profits were up 12.6% on their 2020 level at £189.5 million. With the credit
for impairments in the year, and strong fair value gains reflecting yield
curve movements, overall reported profits before tax were 80.5% higher than
their 2020 equivalent at £213.7 million.
Basic earnings per share were 59.3 pence on an underlying basis and 65.2 pence
on a statutory basis. We continue to operate with a 40% dividend pay-out
policy, which results in a dividend for the year of 26.1 pence, reflecting the
strong underlying performance, impairment releases and fair value movements.
Trading performance
The Mortgage Lending and Commercial Lending divisions have each outperformed
expectations during 2021, delivering strong new business flows, low arrears
and finishing the period with record pipelines.
In Mortgage Lending, where we celebrated 25 years of serving the Private
Rented Sector ('PRS'), we have continued to see strong demand from
professional landlords, who generated 97% of new buy-to-let completions in the
year. Total buy-to-let completions exceeded £1.6 billion in the year,
generating an 8% increase in balances to £11.4 billion. Strong house price
inflation and stable arrears have created a lower impairment requirement
year-on-year and the portfolio remains conservatively leveraged with an
average loan to value ('LTV') of 61.2% and only 1.9% of the portfolio having
an LTV over 80%. The pipeline at the year end exceeded £1 billion, boding
well for continued strong flows into the new financial year. With our
half-year results we announced the cessation of lending on second charge
mortgages, with the business being unattractive at our chosen risk appetite.
All employees were offered redeployment in the wider business, with only six
choosing the alternative of voluntary redundancy.
New business flows in Commercial Lending exceeded £0.97 billion, up 22.9% on
their 2020 levels and above their 2019 equivalent. The growth was strongest in
development finance, where new advances rose 32.5%, year-on-year, reflecting
the continued high demand for residential property development in the UK and
the Group's investment in expanding the relationship team. The development
finance year end pipeline was up 63.2% from its equivalent level in 2020. SME
lending saw a 17.0% increase in origination flows, but these remain below the
pre-Covid equivalent given sector-wide challenges and the broad take-up of
government-backed loans under the CBILS, BBLS and RLS during the year.
However, growth was strongest in the longer-term, asset-secured part of the
operation. The new portal delivered during the year leaves the business well
placed to seize opportunities going forward as this sector recovers. Motor
Finance volumes were broadly flat year on year, but this disguises a strong
second-half recovery and strong momentum being carried through to 2022.
Finally, our structured lending team has now refocused its attentions from
account management to business development, driving portfolio growth and
adding new facilities during the second half of the year.
Capital and funding
The past year has seen a material change in our funding structure, with our
savings proposition delivering an 18.4% growth in balances at attractive
rates. System enhancements during the year enabled increased levels of
deposits to be sourced from third party platforms, while the SME savings
market was accessed for the first time. During March 2021 we became the first
UK bank to successfully issue a Green Tier-2 Bond, at a coupon of almost 3%
less than the bond it was replacing. We have also refinanced the majority of
our legacy securitisation structures, substantially repaid borrowings under
the Bank of England Term Funding Scheme ('TFS') and drawn further on the Term
Funding Scheme with additional incentives for SMEs ('TFSME'). Overall, the
Group's cost of funds has dropped by 39 basis points from its 2020 level.
The refinancing of the legacy securitisation removed over £400 million of
derivative assets from the Group's balance sheet against which regulatory
capital had previously been carried, reducing capital requirements. The
refinancing also facilitated the transition of the bulk of the Group's London
Interbank Offered Rate ('LIBOR')-linked loan exposures to a Term SONIA basis.
For all remaining LIBOR-linked assets an exit strategy is in place and the
Group's remaining LIBOR-linked liabilities were either transitioned during the
financial year, or a transition methodology has been agreed with the relevant
counterparties.
With the strong capital position at the half-year, the Group declared an
interim dividend in line with its guidance (being one half of the previous
year's final dividend) and also announced a share buyback of up to £40
million, with £37.5 million (excluding costs) being utilised by the year end.
This programme will be completed in the early part of the new financial year,
and in December 2021 the Board authorised a further buy-back programme of up
to £50.0 million, acknowledging the Group's continuing capital strength
We also benefitted from revised total capital requirements following the
regular supervisory review undertaken by the PRA in late 2020. This saw our
total capital requirement ('TCR') fall from 10.8% to 8.9% and contributed to a
continued strong surplus over regulatory requirements at 30 September.
The Group submitted its buy-to-let Phase 2 IRB application modules to the PRA
during the year. The process remains protracted, but we continue to receive
constructive engagement from the PRA. In addition to further phases of the
buy-to-let accreditation, our preparations to submit an IRB application for
our development finance business, which represents the next stage in the IRB
roadmap are well advanced.
Business model developments
Key developments during the year include the completion and roll-out of our
Commercial Lending portal and the introduction of auto-decisioning to SME
lending. We have also developed a new digital system for our surveyors,
established a single payment platform across our banking relationships and
implemented Mambu, a cloud-based core banking module, for managing our
portfolio of savings platform relationships. Complementing these completed
developments, our teams are actively managing process improvements in our
Mortgage Lending division, embedding Mambu into development finance, reviewing
post-completion systems across the Group and broadening the scope of our
savings proposition to support additional future capacity.
People
Our people have made a remarkable effort during the past year, working
flexibly to support the business and showing great agility as the operating
and working environment has changed. Against this backdrop, the wellbeing of
our people has been a primary consideration for the Board and has been
demonstrated through numerous initiatives and regular engagement to ensure
that effective feedback and communications were maintained throughout the
year.
Our 2021 employee survey demonstrated exceptional levels of engagement, with
an engagement score of 87% and an employee NPS of +24 , where +21 is the
industry norm. 95% of our people agreed that they are proud to say that they
work at Paragon.
I am pleased to confirm that the Group has also met all its diversity targets
under the Women in Finance Charter, set in 2017, while the Group's EDI
network, designed to ensure Paragon is a fully inclusive employer, was
launched in the year. The new network has already contributed to a number of
Group initiatives in this area.
Having spent much of the year with a working-from-home focus, the Group is now
undertaking a series of hybrid working pattern trials, designed to optimise
the efficiency, control, flexibility and wellbeing features of our longer-term
operating model.
Sustainability
Climate change and sustainability considerations have been at the heart of our
efforts during 2021. Against a backdrop of creating the appropriate focus and
governance around the Group, we launched the first green capital bond to be
issued by a UK bank in March 2021, to replace our existing Tier-2 bond. The
establishment of the Green Bond Framework and associated deployment
commitments reflect the importance of the sustainability agenda within the
Group.
A new Sustainability Committee was established in the year. Products to
promote more energy-efficient properties have been launched in both the
buy-to-let mortgage and development finance areas. Our motor finance operation
began lending on electric vehicles after the year end, following substantial
preparatory work during the year. There has also been material board
engagement regarding the actions the Group needs to take to support the UK's
path to net-zero by 2050.
Internally the Group relocated its London operations to more energy-efficient
premises, reducing its carbon footprint while affirming its commitment to
office-based working and the City as a physical venue for doing business.
The requirements of the Taskforce on Climate-related Financial Disclosures
('TCFD') become binding on the Group in 2022. Our disclosures for 2021 are
materially enhanced and substantially meet these standards, and we have signed
up as a TCFD supporter. Alongside the annual report and accounts we are
publishing our first separate sustainability report, the Responsible Business
Report, which will be accessible via the Group's website.
Outlook
Despite the challenging environment, Paragon leaves its 2021 year with strong
lending pipelines, an increasingly diversified funding structure and strong
capital resources to continue to take advantage of opportunities going
forward, both organic and potentially through further acquisitions, if
appropriate. We are accelerating our investment in technology, enhancing our
customer proposition while preserving the key specialisms that are embedded
within our operating model. Careful consideration of impairment coverage
levels leaves us appropriately provisioned in the event of future
macro-economic volatility or idiosyncratic examples of Covid-related scarring
amongst our customers. With a CET1 ratio of 15.4% and good progress being made
with our IRB applications, our capital position remains strong, supporting
further growth and returns to stakeholders.
MANAGEMENT REPORT
This section reviews the activities of the Group in the year under these
headings
Business review Funding Capital Financial results Operations
Lending and performance for each business line Deposit taking and other sources of finance Regulatory capital, liquidity and distributions Results for the year Systems, people, sustainability and risk
1 2 3 4 5
1 BUSINESS REVIEW
The Group reports its results analysed between three segments, based on
product type, origination, and servicing capabilities. This organisational and
management structure has been in place throughout the year.
New business advances and investments in the year, together with the year-end
loan balances, by division, are summarised below:
Advances in the year Net loan balances
at the year end
2021 2020 2021 2020
£m £m £m £m
Mortgage Lending 1,630.0 1,259.7 11,608.7 10,819.5
Commercial Lending 971.5 790.8 1,568.8 1,514.8
Idem Capital - - 225.1 297.1
2,601.5 2,050.5 13,402.7 12,631.4
The Group's total loan balance increased by 6.1% in the year following a 3.7%
increase in the preceding twelve months. This highlights the Group's ability
to continue to pursue its strategy despite the economic impacts of Covid
through the last eighteen months. Total advances increased 26.9% as the
economy bounced back from the pandemic and exceeded the pre-pandemic levels of
2019, despite lockdowns and other Covid-related restrictions continuing to
impact during the year.
1.1 MORTGAGE LENDING
The Group's Mortgage Lending division principally provides buy-to-let
mortgages secured on UK residential property to specialist landlords. The
buy-to-let mortgage sector celebrated its 25th anniversary in the year and the
Group was one of the first lenders in this market. This gives the Group an
unparalleled understanding of this form of mortgage and the landlord customer
base it targets.
During the period the Group also offered loans to smaller landlords and
limited numbers of owner-occupied first and second charge mortgages on
residential property. However, during the year it withdrew from the second
charge market entirely, to increase its buy-to-let focus. In all its
offerings, the Group targets niche markets where its focus on detailed
case-by-case underwriting and its robust and informed approach to property
risk differentiate it from both mass market and other specialist lenders.
Housing and mortgage market
During the year the housing market in the UK continued to be affected by the
Covid pandemic and the associated relief schemes including payment holidays,
effective prohibitions on some forms of enforcement action and the continuing
availability of stamp duty holidays, which were extended until June 2021.
While the period over which payment holidays were available was extended, the
maximum relief was capped at six months and the immediate impact of such
holidays began to reduce as borrowers reached their maximum allocation.
Lockdowns and social distancing requirements at various points in the year
also put practical constraints on the operation of the housing market.
Activity in the residential property market recovered in the year, boosted by
the stamp duty holiday. Transactions for the year reported by HMRC, at
1,562,000, were 58.3% higher than the 987,000 in the previous year. In their
September 2021 Residential Market Survey, RICS noted positive activity levels
in the market and a stable outlook for property sales.
Despite the year beginning with a pessimistic outlook for property prices from
some forecasters, house prices saw strong growth in the period, with the
Nationwide House Price Index recording a year-on-year increase of 10.0% to
September 2021. RICS forecast continuing growth in the short to medium term,
with demand outstripping supply, however, Nationwide amongst other forecasts
remain cautious as to the medium-term outlook as reliefs unwind, and the Group
continues to position itself conservatively.
New mortgage lending in the market was strong in the year, with the Bank of
England reporting new approvals of £317.3 billion in the year ended 30
September 2021, a 31.0% increase on the £242.3 billion reported for the
previous financial year and a higher value than any year since 2007.
Particularly high volumes were seen in the months leading up to June 2021,
when stamp duty reliefs began to be withdrawn.
At 30 September 2021 the UK Finance ('UKF') survey of mortgage market arrears
and possessions reported arrears remaining at historically low levels, despite
the phasing out of continuing availability of Covid reliefs. Indeed, in a
significant number of cases, customers had been able to reduce arrears during
the pandemic. Possessions remained very low, with the majority relating to
cases already in serious difficulties before the onset of Covid. Based on its
research, UKF concluded that the availability of payment holidays fulfilled
the purpose of enabling borrowers to stay out of arrears through
the pandemic.
The Private Rented Sector ('PRS') and the buy-to-let mortgage market
Specialist landlords form the largest part of the Group's target market. Such
landlords typically let out four or more properties, run their portfolio as a
business and have a high level of personal day-to-day involvement.
The Group considers that the experience of its customers, their level of
involvement and the diversification of their income streams across properties
make them less vulnerable to cash flow shocks in the event of a downturn and
better able to cope when faced with an adverse economic situation. This has
proved to be the case in the Covid pandemic to date, with customers engaging
quickly to manage any risks they faced.
The Group is amongst a small number of specialist lenders addressing this
sector, which is underserved by many of the larger lenders. Some constraint in
supply was seen during the pandemic, with certain non-bank lenders withdrawing
from the market, although by the end of the year most had resumed activity.
New issuance of buy-to-let mortgages followed the trend in the wider property
and mortgage markets. New advances reported by UKF, at £45.1 billion for the
year ended 30 September 2021, were 14.8% higher than for the previous year
(2020: £39.3 billion). This included a 86.3% increase in house purchase
activity with an 8.4% reduction in remortgage activity. Some of this increase
was driven by an increase in the number of amateur landlords, seeking
investments offering returns not available elsewhere, but the activity amongst
professionals was also strong.
In the lettings market RICS' September 2021 UK Residential Market Survey
reported rising tenant demand coupled with a scarcity of new landlord
instructions driving an increase in rents. ARLA Propertymark, in its September
2021 PRS Report, identified 75% of tenants as having experienced year-on-year
increases in rent (2020: 58%) while RICS members continue to predict, on
average, rent increases of 3% over the coming year. This continuing demand
will benefit affordability and cash flows for the Group's landlord customers.
Landlord confidence measures reached a five-year high in the third quarter of
the 2021 calendar year. Independent research carried out for the Group
reported that on all five measures of confidence surveyed: rental yields,
capital gains expectations, the future of their own business, the prospects
for the sector as a whole and the UK financial markets more generally,
optimism was higher than at any time since 2016. Larger landlords were
particularly confident about prospects for their businesses, with 56% feeling
'good' or 'very good'.
The proportion of landlords in the survey reporting increasing tenant demand
had reached the highest level since the survey began, with six out of ten
landlords reporting rising tenant demand, and 30% reporting significant
increases. Only 2% of landlords in the survey reported missing a mortgage
payment, and only one of the landlords surveyed anticipated missing one in the
next three to six months.
Demand for HMO ('house in multiple occupancy') lets remained strong. Despite
concerns as to whether student demand might be particularly affected by the
effects of Covid, this did not transpire in the year, with strong lettings
even where lectures were being delivered online.
The UKF analysis of arrears and possessions also provided analysis of
buy-to‑let cases, showing a similar picture to the wider mortgage market,
with a significant uptake of payment holidays serving to keep arrears and
possessions low, even after these reliefs had expired.
All these factors provide a strong indication of the current strength of the
buy-to-let mortgage market and the opportunities for the Group going forward.
Mortgage Lending activity
The Group's new mortgage lending activity during the year is set out below.
2021 2020
£m £m
Originated assets
Specialist buy-to-let 1,562.2 1,119.0
Non-specialist buy-to-let 52.2 86.4
Total buy-to-let 1,614.4 1,205.4
Owner-occupied 1.5 0.3
Second charge 14.1 54.0
1,630.0 1,259.7
Total mortgage originations in the Group increased by 29.4%, following a
19.7% fall in the preceding year. Activity exceeded the £1,564.4 million of
new advances achieved in 2019, before the Covid outbreak, demonstrating the
impact of real growth, rather than just a Covid bounce-back on the Group's
mortgage business.
Buy-to-let
Advances continue to be focused on specialist buy-to-let, the main focus of
the division's activity. New lending of these products increased by 39.6%
following the 14.9% fall in the 2020 financial year. The £1,562.2 million of
completions was also 22.8% higher than the result for 2019, prior to the
pandemic, demonstrating the strength of the Group's proposition.
Specialist buy-to-let comprised 95.8% of the division's advances, reflecting
the sharpening of focus on this area. Other mortgage lending remains modest in
comparison, with advances declining by 51.8%, in large part due to the Group's
exit from the non-core second charge market during the year. The new business
pipeline, being the loans passing through the underwriting process, stood at a
record £1,008.1 million at the year-end, 8.8% higher than a year earlier
(2020: £926.7 million), providing a strong platform for growth into the 2022
financial year.
The Group sources the majority of its new buy-to-let lending through
specialist intermediaries, and it continues to invest to ensure the service
offered to them is excellent. During the year the Group's regular surveys of
its intermediaries showed 91% were satisfied with the ease of obtaining a
response from the Group (2020: 91%), delivering a NPS at offer stage of +43
(2020: +56). Two thirds (66%) of brokers dealing with the Group rated its
service as better than that provided by other lenders (2020: 68%). Paragon
Mortgages was also named as 'Best Professional Buy-to-let Lender' at the 2021
Your Mortgage awards - the ninth time it has won this title.
During the period the business launched a long-term, in-depth, end-to-end
transformation programme to restructure processes and enhance systems,
increase the effectiveness of the operation and upgrade the offering to both
customers and intermediaries. This represents a significant commitment of time
and resources to the future of the business, with enhancements starting to
come online from the 2022 financial year.
The Group understands the potential for climate change to impact its mortgage
business and seeks to mitigate risk through careful consideration of the
properties on which it will lend. It also continues to develop systems and
refine data to allow its overall position to be measured and the behaviour of
its security portfolio under climate-related stresses to be better understood.
During the year the Group launched its first range of green buy-to-let
mortgages. These market-leading products have a maximum 80% loan-to-value
ratio and offer, lower interest rates for energy efficient properties with EPC
ratings of C or higher. While initially limited to certain property types,
this lending was extended to all properties within the Group's lending
criteria in October 2021.
The UK Government has identified the provision of more energy efficient
housing as a prime objective in its response to climate change, with EPC
levels being set as one of the principal benchmarks to be used. It has
announced a target of upgrading as many homes as possible in the PRS to an EPC
rating of C or higher. In order to achieve this, there is an expectation that
lenders will set minimum quality thresholds, and advantage customers with more
energy efficient properties, as is the case with the Group's green mortgage
products.
The Group has also designated EPC grades as a principal metric for evaluating
climate change risk in its mortgage book and has continued to develop systems
to analyse this data and to ensure that it has reliable and up-to-date
information on as much of its book as possible, including legacy cases. It is
unfortunate that some public information sources are not currently configured
in a way which easily facilitates in-life monitoring and analysis or allows
customers in need of support in improving their properties to be identified.
The Group's latest analysis identified EPC grades for 88.3% of its mortgage
book by value at 30 September 2021 (2020: 85.1%). Of these 98.4% were graded
E or higher (2020: 98.1%) with 37.6% rated A, B or C (2020: 37.7%). The
year-on-year movements are principally a result of refining the data, with
39.7% of new originations in the year having one of the top three grades
(94.2% coverage).
The Group's advances volumes on green buy-to-let lending, which have increased
by 27.7% in the year, are set out below.
2021 2020
£m £m
EPC rated A or B 134.3 112.7
EPC rated C 443.4 339.8
Total rated A to C 577.7 452.5
Coverage (England and Wales) 93% 94%
While the Group monitors EPC performance it is also conscious of the need to
avoid unintended consequences by focussing lending on this. While upgrading
existing properties is beneficial to overall emissions, the demolition and
replacement of properties may be less so.
The Group also monitors the potential physical risks to security values
arising from climate change. This includes assessing a property's flood risk
as part of the underwriting process. At 30 September 2021, approximately
2.5% by number of properties securing the Group's buy-to-let mortgages in
England and Wales were considered to be at medium or high risk of flooding
from the sea or rivers, based on data from the Environment Agency (2020:
2.2%).
The Group continues to refine and develop its use of both internal and
external data to manage climate change risk. However, it recognises the
important part that the development of reliable and easily accessible
information sources by the UK authorities must play in quantifying these
exposures. It would therefore welcome any initiatives by the UK Government to
enhance national reporting as part of its own response to climate change.
The business is currently working with the Green Finance Institute on a number
of industry initiatives to develop standards for mortgage products which would
encourage energy and carbon efficiency for the future, and this work continues
to inform the development of the Group's own buy-to-let product range. Given
that RICS has highlighted cost as one of the principal barriers to energy
efficiency improvements in residential property, the provision of financial
solutions will be key to the achievement of climate goals.
Other lending
Other first and second charge mortgage lending is ancillary to the Group's
main buy‑to‑let focus and is carefully managed to ensure that only lending
with appropriate risks which provides an acceptable return on capital is
undertaken.
Lending in the Group's second charge mortgage operation was scaled back in
summer 2020 in response to Covid, with people transferred to provide support
to other business areas, and lending remaining low in the first half of the
year. The Group took this opportunity to review the long-term strategic
potential of second charge lending in light of its capital requirements and
the Group's overall risk appetite and announced its withdrawal from this
market in May 2021. Completions in the year were £14.1 million compared to
£54.0 million in 2020.
The Group's exposure to first charge residential lending is strictly limited,
given the yields available in this market at acceptable levels of risk, and a
limited demand for products where its specialist approach is cost-effective
and adds value. The opportunities for the Group in this area principally
relate to complex propositions, which will arise on an opportunistic basis,
including lending to the existing professional landlord customer base.
Performance
The outstanding loan balances in the segment are set out below, analysed by
business line.
2021 2020
£m £m
Post-2010 assets
First charge buy-to-let 7,379.0 6,202.5
First charge owner-occupied 35.6 51.2
Second charge 148.1 182.6
7,562.7 6,436.3
Legacy assets
First charge buy-to-let 4,045.3 4,381.3
First charge owner-occupied 0.7 1.9
11,608.7 10,819.5
At 30 September 2021, the total net mortgage portfolio was 7.3% higher than at
the start of the financial year, reflecting strong lending and retention
performance in spite of the on-going impacts of Covid. The balance of
post-2010 buy-to-let lending grew by 19.0% and it now represents 63.6% of the
division's total loan assets (2020: 57.3%).
The annualised redemption rate on buy-to-let mortgage assets, at 6.9% (2020:
6.6%), has continued at a low level, partly due to the continued seasoning of
five-year fixed rate loans, partly to customers adopting a cautious approach
to remortgaging during Covid, but also as a result of the Group's strategic
initiatives to retain customers whose mortgage accounts reach the end of their
fixed rate period.
Covid-related payment holidays were granted on 13,503 of the Group's
buy-to-let accounts which were still live at the year end, representing 19.9%
of the book by number. 5,165 of these holidays were extended (7.6%), but all
of them had expired by 30 September 2021.
Arrears on the buy-to-let book increased in the year to 0.21% (2020: 0.15%),
although part of the increase is attributable to the suppression of arrears by
payment holidays at the previous year end. Arrears on post-2010 lending were
at 0.09% (2020: 0.03%). Despite the small increases, these arrears remain very
low compared to the national buy-to-let market, with UKF reporting arrears of
0.45% across the buy-to-let sector at 30 September 2021 (2020: 0.52%).
While the principal credit metrics for the buy-to-let mortgage portfolio have
remained positive throughout the year, the extent to which these have been
influenced by UK Government interventions, such as furlough payments and other
income support, underpinning tenant rental payments, funding from
government-backed loan schemes accessed by landlords and the stamp duty
holiday, cannot be established from data available. Therefore, the long-term
prospects for the book, as these initiatives begin to be withdrawn, remains
subject to a significant level of uncertainty.
The Group's buy-to-let underwriting is focussed on the credit quality and
financial capability of its customers, underpinned by a robust assessment of
the available security. This approach relies on a detailed and thorough
assessment of the value and suitability of the property as security and this
approach to valuation, including the use of a specialist in-house valuation
team, provides it with significant security in the face of economic stress.
The loan-to-value coverage in its buy-to-let book, at 61.2% (2020: 65.8%)
represents significant security, enhanced over the year by the generally
rising levels of house prices. Levels of interest cover and stressed
affordability in the portfolio remain substantial, leaving customers well
placed to develop their businesses going forward.
Second charge arrears increased to 1.18% from 0.62% in the year, reflecting
the increased seasoning and size of the portfolio and the effect of payment
holidays on the 2020 measure. Of the live second charge accounts at the year
end 470, representing 17.9% of the book by number, had been given payment
holidays during the pandemic, with 256 of those extended (9.8%). No payment
holidays remained in place at the year end.
The Group's receiver of rent process for buy-to-let assets helps to reduce the
level of losses by giving direct access to the rental flows from the
underlying properties, while allowing tenants to stay in their homes. The
Group's receiver of rent team was able to manage tenant rental flows and
occupancy levels through the various pandemic restrictions in the year, to
ensure good outcomes for customers and their tenants. At the year end 553
properties were managed by a receiver on the customer's behalf, a reduction of
11.2% since 2020 (2020: 623 properties). Almost all these cases currently
relate to pre-2010 lending, with cases being resolved on a long-term basis.
Outlook
The division's operations were affected by Covid in the year, however, the
buy-to-let mortgage portfolio continued to grow, with strong credit
performance, despite the circumstances. The year-end pipeline was at record
levels, signposting strong completions into the new financial year. In the
wider market, transactions are increasing, tenant demand is strong and rental
projections are encouraging, with positive landlord and broker sentiment.
These combine to provide an outlook for the Mortgage Lending business in which
it should be able to accelerate out of the pandemic and generate high quality
assets and returns for the Group, while contributing to the development and
renewal of the nation's housing stock.
1.2 COMMERCIAL LENDING
The Group's Commercial Lending division includes four key specialist business
streams lending to, or through, commercial organisations, mostly on a secured
basis. This division had been a major source of growth within the Group before
the impact of Covid and remains a focus for growth going forward.
The four business lines address:
· SME lending, providing leasing for business assets and unsecured cash
flow lending for professional services firms, amongst other products
· Development finance, funding smaller, mostly residential, property
development projects
· Structured lending, providing finance for niche non-bank lenders
· Motor finance, focussed on specialist parts of the sector
Each of these businesses is led by a managing director, supported by a
specialist team with a strong understanding of their market. The principal
competitors for each of the business lines are small banks and non-bank
lenders. The Group operates principally in markets where the largest lenders
have little presence, creating both a credit availability issue for customers
and significant opportunities for the Group.
The Group's strategy for Commercial Lending is to target niches (either
product types or customer groups) where its skill sets and customer service
culture can be best applied, and its capital effectively deployed to optimise
the relationship between growth, risk and return.
The SME sector has been the focus of government-mandated support programmes
throughout the pandemic including payment reliefs from lenders, VAT deferral
schemes and the provision of loans under the Coronavirus Business Interruption
Loan Scheme ('CBILS'), Coronavirus Large Business Interruption Loan Scheme
('CLBILS') Bounce Back Loan Scheme ('BBLS') and Recovery Loan Scheme ('RLS').
These reliefs have resulted in significant increases in cash balances held in
the sector, which makes long-term prospects more difficult to gauge.
During the period the Group has continued to enhance operational functionality
in this area, developing technological solutions and investing in systems,
particularly focussing on administration systems for SME lending and
development finance. These enhancements should provide benefits for both
customer service and in the procuration processes, enabling potential
customers or their brokers to access appropriate finance solutions more
easily and efficiently, while providing the Group with the information needed
to support increasingly technologically advanced decision-making and the
adoption of an IRB capital model for this business.
The division continues to develop its approach to green financing, where
funding can be deployed in support of more climate conscious business
activities, such as supporting local authorities in replacing refuse
collection fleets with greener vehicles. Work is also in progress to classify
the environmental impacts of lending in accordance with the UK's Green
Taxonomy, although the Group's lending connected to 'brown' industries (those
with a high environmental impact) has already been assessed as low.
Commercial Lending activity
The Commercial Lending segment saw a 22.9% increase in new business during the
year following the 18.3% reduction in 2020. Development finance continued its
growth trajectory while SME lending also grew, particularly in its longer term
asset finance product lines. Motor finance operated at a reduced level through
the early part of the year, but returned strongly to the market in the spring.
The new lending activity in the segment during the year is set out below,
analysed by principal business line. As the structured lending business
comprises revolving credit facilities, the net movement in the period is
shown.
2021 2020
£m £m
Development finance 510.4 385.3
SME lending 336.9 288.0
Structured lending 24.0 7.6
Motor finance 100.2 109.9
971.5 790.8
The impact of this new business has been to increase the Group's overall
Commercial Lending exposure by 3.6% in the year to £1,568.8 million (2020:
£1,514.8 million).
Development finance
The continuing growth of the Group's development finance business saw it reach
the milestone of £1.5 billion of total lending over the last three years,
with 13,000 new homes financed in that time. Enhancements to the product range
and the expansion of the relationship team continued throughout the current
year, which alongside an active market, helped drive volumes higher.
The Group's target customer is a small to medium-sized developer of UK
residential property. Projects currently in progress have an average
development value of £7.8 million against which the Group has extended
average facilities of £5.0 million, giving a substantial level of security
cover. These projects are generally focussed on the more liquid parts of the
residential market (houses and smaller blocks of flats), avoiding developments
with high unit values.
The development finance business remained robust throughout the period,
although Covid-related restrictions and supply chain issues meant that many
projects progressed more slowly than they might have done in normal times,
especially in the first half of the year. This, however created an element of
pent-up demand moving into the second half with advances, pipeline and
enquiries strengthening as the year progressed. Market sentiment appears
positive with developers generally optimistic about the future, despite the
short-term supply issues.
While the business has been historically concentrated in the English Home
Counties, with 63.6% of balances at the year end located in London and the
South East (2020: 67.0%), the Group's strategic objective is to lend more
widely across the UK. Central London property hot-spots have generally been
avoided with approximately 4% of the balance located in this area.
During the year the product range was expanded to include finance for projects
in the £0.4 million to £1.0 million range, widening its potential market to
include smaller, growing developers as they expand their businesses as well as
expanding options for existing customers. It also reintroduced lending of up
to 70% of total development value, suspended in response to the pandemic, for
the highest quality propositions. Together these will expand the range of
projects the business is able to consider.
Following the end of the year, the business launched a Green Homes Initiative
to promote the development of energy efficient properties, by halving exit
fees if EPC ratings of A are achieved on 80% or more of units within a
development, incentivising developers to meet the demand for greener
properties and to support the UK's net zero target.
The Group's customers have remained resilient through the Covid pandemic with
delays minimised and completed projects being taken to market. To safeguard
its investments, the Group engages independent monitoring surveyors to review
progress and costs on a regular basis through the build phase of each project.
The volume of new proposals being received increased steadily during the
second half of the year, with the increased amounts of undrawn approvals, at
record levels at the year end, providing a springboard for the beginning of
the new the financial year. Undrawn amounts on live facilities at
30 September 2021 at £500.4 million were 31.4% higher than at the previous
year end (2020: £380.9 million) while the post-offer pipeline of £298.6
million was 74.1% higher (2020: £171.5 million).
During the year, the business invested in both people and systems, while
increasing its national and regional coverage with the recruitment of
experienced specialist relationship directors and portfolio managers. These
initiatives will support the further growth and broadening of the business
going forward. The Group has also made progress on the development of an IRB
capital model for this business, which should reduce the cost of capital in
the longer term, as well as enhancing capital discipline.
The performance of the development finance business through the pandemic has
demonstrated the attractiveness of the proposition going forward. The demand
for new housing in the UK shows no sign of reducing and smaller developers,
who have historically struggled with credit availability, will be needed if
the country's needs are to be met. Sentiment in the market appears positive
entering the new financial year and the Group's business model, its investment
in systems and people and the developments in its product range mean it is
well-placed to support the aspirations of its developer customers and to help
support housing provision across the UK.
SME lending
The SME lending business continued to perform well in the face of
Covid-related constraints throughout the financial year, although certain
business lines were particularly affected by either reduced economic activity,
logistical difficulties in equipment sourcing, payment deferrals reducing the
need for finance or the availability of cost-effective CBILS and BBLS funding.
Lending strengthened considerably in the second half of the year, with the
growth in longer term asset-backed lending particularly encouraging for
income.
Research carried out for the Group during the second half of the year
suggested that 92% of UK SMEs were confident about their ability to bounce
back from Covid, while 22% had already seen their turnover return to pre-Covid
levels. Cash flow was identified as the principal issue for most SMEs, with UK
Government support accessed by the majority. Levels of available cash remained
the principal concern for SMEs looking forward.
This confidence in the sector led to a 17.0% growth In the Group's SME lending
advances in the year, although the performance varied across product types.
Generally all lines reported a stronger second half, with the UK economy
opening up and business confidence beginning to increase.
In the division's core asset leasing business volumes increased by 19.3% to
£198.2 million, excluding government-backed balances (2020: £166.1 million),
with business levels strengthening towards the end of the period. This
reflects the performance of the asset finance market in general, with the
Finance and Leasing Association ('FLA') reporting depressed volumes through
the winter months and business picking up through the summer. Investment in
operating leases has also continued with £13.0 million of assets acquired in
the period (2020: £12.9 million).
The Group continued to advance loans under the UK Government-sponsored British
Business Bank's CBILS and BBLS programmes to support SMEs potentially affected
by the Covid pandemic, until those schemes closed for new applications in
March 2021. The Group has been authorised to take part in the follow-on RLS
programme and began lending under the scheme in the second half of the year.
RLS loans have the benefit of an 80% government guarantee (after the proceeds
of any business assets are applied for leasing balances), but unlike CBILS
lending, customers will be required to meet interest payments from the outset
of the loan.
The existing RLS scheme closes for new offers from 31 December 2021 and will
be replaced by a scheme with a 70% government guarantee. The Group expects to
use these schemes to provide support to SME customers until 30 June 2022, the
currently expected end date of the schemes. The Group's lending in this area
has been primarily focussed on its existing customers, and the majority of
both BBILS and RLS lending has been on asset-secured products.
During the year £64.2 million was advanced under schemes backed by a
government guarantee (2020: £25.9 million), of which £50.4 million was asset
leasing business. The Group continues to closely monitor the portfolio for any
adverse indications, particularly at the point at which customers, rather
than the Government, are expected to commence payments.
Short-term lending to professional services firms outside the government
supported schemes fell by 21.6% to £62.0 million (2020: £79.1 million).
Despite this fall in volumes, this represents a recovery in the second half to
the year following twelve months of very low volumes during the pandemic. This
resulted from both the deferral of tax balances, where customers had
customarily taken out short-term loans to spread the impact, and of the wide
availability of cheap CBILS and BBLS lending in the market. The second half of
the year saw the impact of these factors diminishing and lending moving back
towards pre-Covid levels with the underlying requirement for finance remaining
for the longer term.
The Group has continued to invest in system improvements to create efficiency
gains in this business throughout the year despite the pandemic. Enhancements
to the new lending process were rolled out in April, offering improvements for
customers and brokers including the launch of a new finance broker portal,
providing enhanced functionality, in response to extensive research amongst
the broker community.
The finance broker portal, which provides significant benefits in terms of
process automation and response speed was rolled out to a larger population
following the year end and the reengineering programme will continue into the
new financial year, enhancing controls, operational agility and the customer
experience.
With the FLA quarterly industry outlook survey showing 90% of providers
expecting new business growth in the next twelve months, growing confidence in
the customer base, a strengthening new business pipeline and system
developments coming on line, the Group is optimistic for the future prospects
for the business.
Structured lending
The Group's structured lending exposure has seen an increased level of
activity in the year, with several new facilities agreed, diversifying the
business' exposures and the overall balance increasing.
Structured lending facilities generally fund non-bank lenders of various kinds
providing the Group with increased product diversification. The facilities are
constructed to provide a buffer for the Group in the event of default in the
ultimate customer population. The Group's experienced account managers have
received regular reporting on the performance of the security assets, and they
maintained a high level of contact with the Group's customers throughout the
Covid crisis to safeguard its position.
The Group has a number of well-progressed additional facilities in the
pipeline, with an expectation of more drawings in the new financial year.
These include new asset classes, spreading the risk inherent in such lending.
The Group continues to actively seek new opportunities in this field, with a
particular interest in facilities linked to green initiatives.
Motor finance
The Group's motor finance business is a focussed operation targeting
propositions which are not addressed by mass-market lenders, including
specialist makes and vehicle types, such as light commercial vehicles,
motorhomes and caravans.
During the first part of the year the Group operated tighter lending criteria
and temporarily diverted resources from the new business teams in the area to
support the wider Group's customer servicing requirements through the
pandemic, including the provision of payment reliefs. In the second half the
Group relaunched its proposition with a renewed focus as dealerships began to
open and market activity increased.
Following the year end the operation extended its lending criteria to include
battery electric cars for the first time, following consultation with dealers
and brokers. This will help to support the UK's move away from petrol and
diesel powered vehicles.
The Group's advances in the year reflect this operational strategy, with
£100.2 million of completions in the year, a broadly similar level to the
£109.9 million achieved in 2020. However, this represents a significant
post-Covid recovery with £71.4 million of advances in the second half of the
year, compared to £28.8 million in the first half and £35.1 million in the
second half of 2020. This returns completions to the level seen in the first
half of 2020, before the outbreak when advances of £74.8 million were made.
This Group's performance follows the trajectory of the wider motor finance
market, with the FLA reporting falling volumes until February 2021, before a
recovery beginning to take hold in March.
Performance
The outstanding loan balances in the segment are set out below, analysed by
business line.
2021 2020
£m £m
Asset leasing 468.7 478.0
Professions finance 33.1 22.3
CBILS, BBLS and RLS 83.8 25.2
Invoice finance 20.9 13.5
Unsecured business lending 10.3 15.0
Total SME lending 616.8 554.0
Development finance 608.2 609.0
Structured lending 118.9 94.9
Motor finance 224.9 256.9
1,568.8 1,514.8
Credit quality in the development finance book has been good, and the overall
performance of the projects has been in line with expectations, with the
pandemic having no significant impact on the disposal of completed
developments. Accounts are regularly monitored and graded on a case-by-case
basis by the Credit Risk function. At 30 September 2021 only one account had
been identified as at risk of loss, a long standing legacy case. While the
impact of Covid on development finance projects has been limited to issues
relating to the progress of some projects, rather than credit concerns, the
Group recognises the potential impact of increased economic uncertainty and
execution risk on its portfolio.
The average loan to gross development value for the portfolio at the year end,
a measure of security cover, was 61.7% (2020: 63.1%), which gives the Group a
substantial buffer if any project encounters problems. No new serious credit
issues arose during the financial year and a number of problem cases
identified in prior periods were resolved.
Credit performance in the division's finance leasing portfolios generally
remains relatively stable, with arrears in asset leasing at 0.27% and motor
finance at 2.30% (2020: 1.75% and 1.76% respectively), however there have been
a small number of cases where serious credit issues have been identified and
the sector is expected to display more volatile credit performance as
government support initiatives unwind.
Of the division's live motor finance accounts at 30 September 2021, 1,507
cases (9.5%) had been granted payment holidays during the course of the
pandemic with 312 (2.0% of cases) of those holidays extended. None of these
payment holidays remained in place at the year end.
In SME lending 2,570 of the live accounts at 30 September 2021 had been
granted payment holidays with 316 of those extended, of which 28 remained in
place at the year end.
The majority of CBILS and BBLS lending remained in its initial twelve-month
period where interest payments were met by the UK Government throughout the
financial year. Payments from customers began to fall due in the second half
of the financial year on a limited number of accounts in the first tranches on
lending, and the Group has appropriate systems, processes and resource in
place to deal with any issues as they arise. Of the guaranteed portfolio,
£5.0 million (2020: £4.6 million) comprises fully guaranteed BBLS loans.
With the exception of a small number of irregularly submitted applications,
where claims have been submitted under the guarantee scheme, the Group has yet
to encounter any serious credit issues with its CBILS and BBLS portfolios. Any
emerging payment behaviours will be kept under close scrutiny.
In the structured lending business, the Group carefully monitors the
performance of the underlying asset pool on a monthly basis, to ensure its
security remains adequate. The Group relies on its data monitoring and
verification processes to ensure that these reviews are able to detect any
credit issues. Performance in the year has been in line with expectations,
with generally improved metrics across the book and only one loan remaining in
IFRS 9 Stage 2 at the year end.
Outlook
The Group's Commercial Lending division has emerged from Covid well placed for
future growth. Work to develop products, systems and services has been ongoing
throughout the pandemic and the year ended with increased pipelines and
building momentum.
With sentiment largely positive in the division's customer base, and new,
green product ranges launched in the new year, the Group is optimistic for its
prospects in the Commercial Lending space.
1.3 IDEM CAPITAL
The Idem Capital segment contains the Group's acquired loan portfolios,
together with its pre-2010 legacy consumer accounts. These include mostly
second charge and unsecured consumer loans. The division's success rests on
understanding assets, strong analytics, advanced servicing capabilities and
the efficient use of funding.
When considering portfolios for acquisition the Group currently focusses on
specialist loan portfolios which might augment its own organic origination
activities. This model is essentially opportunistic and the flow of
appropriate opportunities to the market is both limited and sporadic, even in
a normal economic environment.
The Group carefully considers the capital requirements for any potential
acquisition, particularly where the asset types offered require relatively
large amounts of regulatory capital to be held. It also evaluates the
potential for conduct risk issues to arise in portfolios which may contain
more vulnerable customers. The Group will only pursue transactions where it
considers that its wider capabilities in specialist administration and funding
can provide a real benefit and where the projected return is attractive in
comparison to the other opportunities for the deployment of its capital.
The Idem Capital back book includes consumer lending portfolios where
customers may have historically rescheduled their debt repayments and its
processes aim to generate fair outcomes for all customers, recognising any
vulnerabilities. This aim has formed a principal focus in the Group's response
to Covid in respect of such customers.
New business
Although the UK loan portfolio market remained active in the period, the
impact of Covid continued to depress activity levels, and complicated the
pricing and execution of potential deals, discouraging vendors from coming to
market.
During the period, no portfolio acquisitions were completed (2020: none)
although the division undertook a limited number of reviews of opportunities
that were ultimately not progressed.
The main focus of the business in the year was the careful management of its
existing books and ensuring that appropriate processes and systems are in
place to address the Covid outbreak with customers, many of whom were already
identified as vulnerable or who had developed vulnerabilities as a result of
the ongoing pandemic.
Performance
The value of the loan balances in the segment are set out below, analysed by
business line.
2021 2020
£m £m
Second charge mortgage loans 133.6 171.9
Unsecured consumer loans 87.2 109.7
Motor finance 4.3 15.5
225.1 297.1
Balances in the segment have continued to decline as outstanding amounts are
collected on existing portfolios, with no additions in the period. Cash flows
remained strong across all books, despite the on-going effects of Covid on
consumers. This level of collections resulted in the 120 month Estimated
Remaining Collections ('ERC'), a measure of future expected cash flows, on
acquired consumer assets falling to £245.2 million at 30 September 2021
(2020: £313.7 million).
Arrears on the segment's secured lending business have risen to 24.3% (2020:
18.8%). These arrears levels remain higher than the average for the sector,
but this reflects the seasoning of the balances, while the continuing upward
trend reflects the redemption of performing accounts. This book contains a
significant number of accounts which are currently making full monthly
payments but had missed payments at some point in the past, inflating the
arrears rate. Average arrears for secured lending of 8.6% at
30 September 2021 were reported by the FLA (2020: 8.4%).
Of the division's live secured lending accounts at 30 September 2021, 1,270
cases (14.1%) had been granted payment holidays during the course of the
pandemic with 578 (6.4% of cases) of those holidays extended. In the motor
finance portfolio 463 live cases (15.6%) had received a payment holiday with
136 (4.6%) having been extended. No payment holidays remained in place at the
year end.
None of the live Idem Capital loan portfolios were regarded as materially
underperforming at the year end, with cash generation continuing to hold up.
The Group monitors actual cash receipts from acquired portfolios against those
forecast in the pre-purchase evaluation of the portfolio. Up to 30 September
2021 these collections were 109.8% of those forecast to that point (2020:
109.8%).
The Group continues to invest in systems and people to ensure that Idem
Capital customers receive an efficient and effective service which delivers
fair outcomes. Given the nature of the books, particular attention is given to
providing training and establishing processes to ensure that vulnerable
customers are identified, and their needs are addressed.
Outlook
The Group's strategy for the Idem Capital business is to consider only those
opportunities which would enhance its overall positioning, provide attractive
returns and represent a productive use of capital. These will be essentially
opportunistic, and there is no volume target.
In the meantime, the division will continue to focus on its commitment to
providing appropriate outcomes for its existing customers as it has done
throughout the Covid pandemic and ensuring any vulnerability issues are
carefully addressed.
2 FUNDING
The Group is principally funded by retail deposits but also accesses a variety
of other funding sources. This maintains an adaptable and sustainable funding
position as the business and its operating environment develop. The Group is
therefore able to access cost-effective funding despite issues in any
particular funding market, as well as raising funding for strategic
initiatives on a timely basis.
Throughout the period the Group raised the majority of its new funding through
the retail deposit market, where demand for deposit products has remained
strong, with consumers trending towards saving rather than spending in the
year, either through increased prudence or merely through the reduction in
'big-ticket' spending opportunities caused by lockdowns and other
Covid-related measures. It has also continued to draw on the Bank of England
TFSME scheme to support its lending to SME customers.
The Group's funding at 30 September 2021 is summarised as follows:
2021 2020 2019
£m £m £m
Retail deposit balances 9,300.4 7,856.6 6,391.9
Securitised and warehouse funding 1,246.0 3,928.3 5,206.9
Central bank facilities 2,819.0 1,854.4 994.4
Tier 2 and retail bonds 386.1 446.6 446.1
Total on balance sheet funding 13,751.5 14,085.9 13,039.3
Off balance sheet central bank facilities - - 109.0
Other off balance sheet liquidity facilities 150.0 150.0 -
13,901.5 14,235.9 13,148.3
The Group's retail deposit balance grew by 18.4% in the year to £9,300.4
million (2020: £7,856.6 million), representing over two thirds (67.6%) of
balance sheet funding (2020: 55.8%), with wholesale borrowings continuing to
reduce over the year.
At 30 September 2021 the proportion of easy access deposits, which are
repayable on demand, was 24.1% of total on-balance sheet funding (2020:
16.8%). This increase is partly a result of market sentiment with savers
reluctant to commit funds to term deposits in a low rate environment, and
partly as a result of the Group's maturing liquidity policy. This percentage
remains low compared to the rest of the banking sector and can be expected to
rise going forward.
With the generally uncertain economic outlook, the Group has maintained a
cautious approach to liquidity in the period. Some loosening of policy took
place in the period in response to the gradual opening up of the UK economy,
but at the end of the year the Group still had £1,236.5 million of cash
available for liquidity and other purposes (2020: £1,701.1 million). The
Group's contingent liquidity policy will be kept under review as the ultimate
outcome of the Covid crisis becomes clearer and longer-term trends become more
evident, but the Group intends to maintain a conservative approach.
The Group's long-term funding strategy, following the granting of its banking
licence in 2014, has been to move to using retail deposits as its primary
funding source, using the debt markets on an opportunistic basis for
additional funding requirements.
The Group's response to the withdrawal of LIBOR, due at the end of the
calendar year, is well progressed. While LIBOR had been the principal
benchmark rate used by the Group, a transition to other, risk-free rates,
notably rates linked to SONIA, has been ongoing for more than two years.
No new LIBOR-linked derivative contracts have been entered into since February
2020 and remaining LIBOR-linked derivatives will transition to SONIA in
accordance with the International Swaps and Derivatives Association ('ISDA')
protocol. Meanwhile, all the Group's LIBOR-linked borrowings have either been
retired, transitioned or have an agreed transition process in place.
A transition process for the Group's principal LIBOR-linked asset class,
legacy buy-to-let mortgages, was communicated to customers and completed in
the second half of the year. Other LIBOR-linked assets have either been
transitioned, have an agreed transition methodology or are expected to fall
due before the LIBOR transition data. Overall, the Group considers that it is
well placed to meet the withdrawal deadline of 31 December 2021.
2.1 RETAIL FUNDING
The Group considers the retail deposit market to be a reliable, scalable and
cost-effective source of funding, which has remained fully functional
throughout the Covid crisis. The Group's offering has been centred on sterling
household deposits, although it began to access the SME sterling deposit
market in the year.
A variety of products are offered, including term deposits, ISAs and easy
access accounts and accesses the market through a variety of in-house and
external channels. The proposition is based on competitive rates and value for
money, combined with the Group's strong customer service ethic and the
protection provided to depositors by the Financial Services Compensation
Scheme ('FSCS').
The retail deposit market in the UK is large, deep and well developed. During
the year UK household savings balances reported by the Bank of England
continued to increase with balances at 30 September 2021 reaching £1,402.5
billion (2020: £1,287.9 billion), an increase of 8.9% in the year. This has
resulted from increased saving by consumers during the pandemic and has also
depressed market interest rates. Some of this increase may be reversed as the
UK economy returns to a more normal footing, but as a small participant the
Group is less likely to be affected by this than larger banks and building
societies.
The Group's retail deposit franchise has continued to perform strongly in the
year with a reduced funding cost, reflecting the improvements, increased
channels to market and downward market pressures on rates.
Savings accounts at the financial year end are analysed below.
Average interest rate Proportion of deposits
2021 2020 2021 2020
% % % %
Fixed rate deposits 1.25% 1.69% 58.8% 63.3%
Variable rate deposits 0.42% 0.72% 41.2% 36.7%
All balances 0.91% 1.34% 100.0% 100.0%
The average initial term of fixed rate deposits was 26 months (2020: 27
months). Market savings rates in the year have remained at historically low
levels, with the Bank of England quoting average interest rates at
30 September 2021 for new 2-year fixed rate deposits at 0.46% (2020: 0.48%)
and for instant access balances at 0.10% (2020: 0.07%).
During the year the Group has grown its business both through a focus on its
in-house channel and through expanding its offering across other third party
platforms. Significant infrastructure investment in the Group's new Mambu
platform has enabled the number of external channels where the Group has a
presence to be expanded while embedding a strong control environment,
providing an effective and efficient service and offering future digital
optionality.
Offerings through these channels, which include investment platforms and
savings marketplaces operated by digital banks, provide access to a different
customer demographic to the Group's mainstream customers. This more
diversified sourcing offers enhanced opportunities to manage inflows and
costs. The Group has added three new relationships in the period, including
one with Aviva Savings, bringing the total to seven. These channels now
represent around 12% of the total deposit base and the system investment in
the year gives the Group capacity to expand further in this area.
The Group regards the quality of its customer service as a vital component of
its savings market strategy and conducts insight surveys throughout the
customer journey. In this research 88% of customers opening a savings account
with the Group in the year who provided data, stated that they would
'probably' or 'definitely' take a second product (2020: 88%). The NPS in the
same survey was +58, similar to that in the previous year (2020: +61).
When customers with maturing savings balances in the year were surveyed, 89%
stated that they would 'probably' or 'definitely' consider taking out a
replacement product with the Group (2020: 90%) with a NPS at maturity of +52,
slightly increased from the 2020 financial year (2020: +50).
These positive responses demonstrate the quality of the Group's customer
interaction operations, which support its efforts to retain customers and
deposits in the current active and competitive market. This has been enhanced
in the year with additional functionality on the Group's website, such as
automated password rests, introduced in response to customer feedback.
This level of customer satisfaction is also demonstrated by the Group's
continuing success in industry awards. During the year awards won included
'Best Internet Account Provider' at the 2021 Moneyfacts Awards, 'Best Cash ISA
Provider' at the 2021 YourMoney awards, 'ISA Provider of the Year' at the 2020
MoneyAge awards, 'Best Notice Savings Provider' at the 2021 Moneynet awards,
'Best Easy Access Savings Provider' and 'Best Easy Access Cash ISA Provider'
in the MoneyComms 2021 Top Performers list and 'Best Cash ISA Provider' in the
2021 Savings Champion Awards.
Both aspects of the Group's savings infrastructure, its outsourced deposit
administration system and its infrastructure supporting external savings
platforms, continue to provide a solid and scalable operating model for the
business. Service standards and customer satisfaction have been maintained
despite the effects of ongoing Covid restrictions, and servicing resources
have continued to develop with the business.
The retail deposit funding stream provides a stable principal funding base for
the Group's operations where volumes and rates can be effectively and flexibly
managed. The operation will continue to develop on a strategic basis,
expanding its offerings, addressing wider demographics and expanding its
presence on third party platforms. This increasing diversification and the
FSCS guarantee are likely to reduce the potential for liquidity impacts and
the Group's profiling of its target customers suggests they may be more
resilient than average in the event of future economic stresses.
2.2 CENTRAL BANK FACILITIES
The Bank of England Term Funding scheme for SMEs ('TFSME') continued to be
available throughout the year to support lenders in providing credit to SME
customers through the Covid pandemic. The Group has continued to draw on these
funds to support its lending, particularly in its SME lending and development
finance businesses.
During the year the Group's drawings under TFSME increased to £2,750.0
million (2020: £910.0 million). As TFSME provides funding at or very close to
base rate, it is a particularly cost-effective form of borrowing for lenders
which, like the Group, wish to support their SME customers through the
economic uncertainties of the pandemic. Shortly after the year end the Group
repaid and redrew all of its TFSME borrowings, extending the maturities.
Drawings under the Bank of England's original Term Funding Scheme ('TFS')
which were due to mature in the current financial year began to be retired
early during the period, improving the maturity profile of the Group's
borrowings. At 30 September 2021 the remaining TFS borrowings provide £69.0
million of the Group's funding (2020: £944.4 million), but will be repaid in
the early part of the new financial year. The Group retains access to other
Bank of England funding channels but did not utilise them in the year.
The Group expects to continue to make use of these facilities going forward,
in accordance with the objectives of the schemes. Where using them is
appropriate and cost-effective, mortgage loans pre-positioned with the Bank of
England are available to act as collateral for future drawings, if and when
required. This provides access to potential liquidity or funding of up to
£1,424.2 million (2020: £684.0 million).
2.3 WHOLESALE FUNDING
The Group's wholesale funding includes securitisation funding, warehouse bank
debt and retail and Tier‑2 corporate bonds, which are each accessed from
time to time as appropriate. The Group's Long-Term Issuer Default Rating was
affirmed at BBB by Fitch in March 2021, with the outlook upgraded from
negative to stable, reversing the change which was applied to all the major UK
banks during 2020 as a result of the Covid crisis.
During the year capital markets remained active, with activity in most areas
of funding. The securitisation markets remained open, but with most volume
driven by those lenders without access to central bank facilities.
Wholesale pricing has been attractive for issuers, with strong demand for new
issuance. Against this backdrop the Group issued a £150.0 million Tier-2
Green Bond in March 2021. This was the first issuance certified under the
Group's Green Bond Framework, approved in March 2021, which sets out how the
proceeds of the bond will be applied, and which is available on the Group's
website at www.paragonbankinggroup.co.uk.
The new bond carries an interest rate of 4.375%, fixed for five years, and
will count in full towards tier 2 capital for a five year period. It was
rated BB+ by Fitch on issue. This interest rate represents a considerable
saving on the Group's previous Tier-2 bond, issued in 2016, which bore
interest at 7.25% per annum.
The majority of the Group's £150.0 million 2016 Tier-2 Bond was acquired by
the Group in a tender process during March 2021. The remainder was redeemed at
the call date in September 2021.
These bond transactions reduce overall funding costs and place the Group's
tier 2 capital position on a longer-term footing, as well as accessing the
green bond market.
Historically the Group has been one of the principal issuers of UK residential
mortgage backed securities ('RMBS'), however its reliance on this funding
source has been significantly reduced over recent years, with the most recent
issuance held internally rather than issued in the market.
The Group's four mature legacy securitisation transactions were refinanced
during the period. An agreement was also reached in the period to transition
the only other LIBOR-linked deal, Paragon Mortgages (No. 25) PLC, from its
interest payment date in February 2022. These transactions benefit the Group's
overall long-term funding position by releasing cash collateral; removing
LIBOR-linked liabilities ahead of transition; crystallising derivative
positions, thereby reducing the Group's TRE for capital purposes; and
releasing loan assets for use in creating eligible securities which can be
used to access TFSME and other forms of funding.
A fully-retained securitisation transaction, Paragon Mortgages (No. 28) PLC,
was completed in the year. In this transaction £703.1 million of rated notes
were issued to group companies, to be used as collateral in other funding
transactions, such as TFSME. This repeats the structure of Paragon Mortgages
(No. 27) PLC, issued in 2020.
The Group renegotiated its £400.0 million warehouse funding facility during
the period reducing the interest margin from 1.05% above LIBOR to 0.60% above
LIBOR. This facility is used to provide standby capability, particularly in
the event of market disruption elsewhere, where funds need to be deployed
rapidly or as an alternative to retail deposit funding for liquidity purposes.
After the year end this facility was extended to £450.0 million and the
interest rate was transitioned to 0.50% over SONIA. These changes will make
this funding more cost effective and practical going forward.
The Group's retail bond issued in 2013 was repaid at maturity in December
2020. The Group also entered into sale and repurchase transactions from time
to time, to ensure it retains access to this channel for liquidity purposes.
Overall, these initiatives reduced the Group's dependency on legacy
securitisation debt, lowered funding costs, facilitated LIBOR transition, and
increased average remaining maturities for its other borrowings. This
demonstrates the adaptability of the Group's wholesale funding activities and
the Group will continue to access all these funding sources on a strategic and
opportunistic basis as appropriate.
2.4 FUNDING OUTLOOK
The year has seen growth in the Group's savings franchise, while the tenor of
its wholesale and central bank borrowings has been extended, with the average
cost of funding reduced and the green finance market accessed for the first
time.
This has been consistent with the Group's funding strategy, developing and
enhancing its access to funding sources while maintaining its principal focus
on the retail savings market. The Group is well placed to maintain this
diverse, robust and adaptable strategy going forward, which will support the
needs of its developing business into the future.
Further information on all the above borrowings is given in note 15
3 CAPITAL
The Group's capital policy is designed to provide appropriate returns to
shareholders, preserve the strength of its balance sheet, maintain strong
regulatory capital and liquidity positions to safeguard its depositors and to
ensure sufficient capital is available to meet strategic objectives in
opportunities going forward. The safeguarding of this capital strength has
been a fundamental objective of the Group's ongoing Covid response.
This enabled the Group to return to a more normal approach to capital and
distributions in the year ended 30 September 2021, with an interim dividend
declared and share buy-backs undertaken. The Group's position was also
enhanced by a favourable result from the most recent regulatory review of its
capital position, which reduced its requirement to hold regulatory capital.
For regulatory purposes the Group's capital comprises shareholders' equity and
its Tier-2 green bond. It has no outstanding Additional Tier 1 ('AT1')
issuance, but has the capacity to issue such securities, if considered
appropriate, under an authority granted by shareholders at the 2021 Annual
General Meeting ('AGM'), which will be proposed for renewal at the 2022
meeting.
3.1 REGULATORY CAPITAL
The Group continued to maintain strong regulatory capital ratios throughout
the year, with capital balances having grown as a result of its prudent
approach to capital management through the Covid pandemic. During the period
the PRA conducted a supervisory review of the Group's capital requirements,
based on the Internal Capital Adequacy Assessment Process ('ICAAP') analysis.
The results of this review were very positive, with the regulator
significantly reducing its capital requirement based on its assessment of the
Group's risk exposures and management systems.
The Group is subject to supervision by the Prudential Regulation Authority
('PRA') on a consolidated basis, as a group containing an authorised bank. As
part of this supervision, the regulator will issue a Total Capital Requirement
('TCR') setting an amount of regulatory capital, defined under the
international Basel III rules, currently implemented through the EU Capital
Requirements Regulation and Directive regime ('CRD IV'), which was transposed
to the PRA Rulebook as part of the Brexit arrangements.
The TCR includes elements determined based on the Group's total risk exposure
together with fixed elements, and is held in order to safeguard depositors in
the event of severe losses being incurred by the Group.
As a matter of strategy, the Group maintains strong capital and leverage
ratios. It was granted transitional relief on the adoption of IFRS 9, along
with most other banks, with additional relief granted in 2020 for the impact
on capital of provisions created in response to the Covid pandemic.
The PRA requires firms to disclose capital measures both on the regulatory
basis and as if these reliefs had not been given, referred to as the 'fully
loaded' basis. The Group's principal capital measures, CET1 and Total
Regulatory Capital ('TRC') are set out below on both bases.
Regulatory basis Fully loaded basis
2021 2020 2021 2020
£m £m £m £m
Capital
CET1 capital 1,055.8 991.2 1,026.1 948.9
Total Regulatory Capital ('TRC') 1,205.8 1,141.2 1,176.1 1,098.9
Requirement
TCR 604.2 749.6 601.8 745.3
As the value of IFRS 9 reliefs will taper over time, the difference between
measures on the regulatory and fully loaded bases will narrow and eventually
converge.
The Group's CET1 capital comprises its equity shareholders' funds, adjusted as
required by the CRD IV rules and can be used for all capital purposes. TRC, in
addition, includes tier-2 capital representing the Tier 2 Bonds. This tier 2
capital can be used to meet up to 25% of the Group's TCR. The increase in
capital over the year is a result of the positive trading performance, which
outweighed the impact of dividend payments and share buy-backs in the period.
The TCR is specific to the Group and is set by the regulator, based on its
supervisory reviews. The reduction in TCR on both the regulatory and fully
loaded bases shown above has arisen principally as a result of the successful
outcome of the most recent review process.
This saw the TCR on both bases reduced to 8.9% of TRE from 10.8% of TRE at
30 September 2020, compared to the minimum TCR allowed under the Basel III
framework of 8.0%. This represents a significant benefit to the Group's
capital management and reflects the maturity of the Group's systems for the
management of capital and risk.
CET1 capital must also cover the CRD IV buffers, the Counter-Cyclical ('CCyB')
and Capital Conservation ('CCoB') buffers. These apply to all firms and are
based on a percentage of total risk exposure. The CCoB remained at 2.5%, its
long-term rate, throughout the year (2020: 2.5%), while the UK CCyB remained
at 0.0% (2020: 0.0%), having been reduced from 1.0% during 2020 as a
regulatory response to the pandemic. However, it has been stated by the
Financial Policy Committee of the Bank of England that the long-term standard
rate of the CCyB will be 2.0% and this requirement for additional capital in
the future has been factored into the Group's capital planning.
CET1 capital required to cover CRD IV buffers therefore reduced to £170.9
million at the year end on the regulatory basis (2020: £173.7 million).
Further buffers may be set by the PRA on a firm-by-firm basis but cannot
be disclosed.
The Group's capital ratios, after allowing for the proposed dividend for the
year, are set out below.
Basic Fully loaded
2021 2020 2021 2020
CET1 ratio 15.4% 14.3% 15.1% 13.7%
Total capital ratio 17.6% 16.4% 17.3% 15.9%
UK leverage ratio 7.5% 7.1% 7.3% 6.8%
All of the Group's capital ratios show strong improvement over the period,
despite the resumption of distributions to shareholders. This reflects the
trading profits, including a reduction in Covid-based impairment provisions, a
gain on the pension scheme liability and reductions in risk weighted asset
values following the repackaging of legacy securitisations.
The Basel Committee on Banking Supervision ('BCBS') has set the implementation
date for its revisions to the Basel III framework as 1 January 2023. This is,
however, subject to those revisions being enacted in the relevant
jurisdiction. Following the UK's exit from the EU, these rules are expected to
be enacted for UK banks through the PRA Rulebook. The PRA has also launched a
more extensive consultation on its approach to regulating non-systemically
important banks without international activities. The Group is monitoring
these developments and will respond through its capital planning as
appropriate.
The Group submitted the second stage of its application for the accreditation
of its IRB approach to buy-to-let credit risk for capital adequacy purposes to
the PRA in March 2021. The project continues to progress to plan, and work
continues into the new financial year on both the buy-to-let portfolio and on
development finance lending, which represents the next step in the Group's IRB
roadmap.
3.2 LIQUIDITY
It is Group policy to hold sufficient liquidity in the business to meet cash
requirements in the short and long term, as well as to provide a buffer under
stress. There is also a regulatory requirement to hold liquidity in Paragon
Bank. This policy has a consequent effect on the Group's operational capital
and funding requirements.
The Board regularly reviews liquidity risk appetite and closely monitors a
number of key internal and external measures. The most significant of these,
which are calculated for the Paragon Bank regulatory group on a basis which is
standardised across the banking industry, are the Liquidity Coverage Ratio
('LCR') and Net Stable Funding Ratio ('NSFR').
The LCR measures short-term resilience and compares available highly liquid
assets to forecast short-term outflows, calculated according to a prescribed
formula, with a 30 day horizon. The monthly average of the Bank's LCR for the
period was 165.6% compared to 173.7% during the 2020 financial year. The
reduction is a liquidity policy response to the reduction in Covid-related
impacts to the business and in the wider economy.
The NSFR is a longer-term measure of liquidity with a one year horizon,
supporting the management of balance sheet maturities. At 30 September 2021
the Bank's NSFR stood at 119.6% (30 September 2020: 114.7%), reflecting the
strengthening of the overall funding and capital position over the year.
3.3 DIVIDENDS AND DISTRIBUTION POLICY
The Group's distribution policy over recent years has been based on the
objective of enhancing shareholder returns on a sustainable basis, while
protecting the capital base. In order to achieve this, its stated policy has
been to distribute 40% of consolidated earnings to shareholders in ordinary
circumstances, achieving a dividend cover ratio of approximately 2.5 times. It
has also undertaken buy-backs of shares in the market from time to time as
part of its management of overall capital, where these enhance shareholder
value.
The Group managed its capital cautiously through the pandemic and accumulated
a capital and cash surplus over its requirements, including its regulatory
requirements, to the level that it was considered appropriate to resume
distributions to its shareholders, both in the form of dividends, and in a
share buy-back, addressing the needs of different investor groups.
An interim dividend for the year of 7.2 pence per share (2020: nil pence per
share) was paid in July 2021 and the Board is proposing, subject to approval
at the AGM on 2 March 2022, a final dividend for the year of 18.9 pence per
share (2020: 14.4p per share). This would give a total dividend of 26.1 pence
per share (2020: 14.4p per share). This dividend would be in line with the
stated policy, giving a dividend cover of 2.50 times (2020: 2.50 times).
The 81.3% increase in total dividend from 2021 reflects the increase in group
earnings, including the impact of Covid-related impairment provisions made in
2020 reversing in the current year, which effectively deferred dividend to
2021. The 2021 dividend is also inflated by the high level of fair value gains
in the year, which would not necessarily be repeated in a future year. Care
must therefore be taken in extrapolating future dividend levels from the
current year dividend alone.
The directors have considered the distributable reserves and available
resources of the Company and concluded that such the proposed dividend is
appropriate.
In addition, the Board authorised a buy-back of up to £40.0 million of shares
in the market, initially to be held in treasury. The Group has the authority
to make such purchases under a resolution approved by shareholders at the AGM
in February 2021. £37.5 million (excluding costs) was expended during the
year on the buy-back programme, and it is the Board's intention to complete
the programme following the announcement of the annual results.
As part of its review of the Group's capital and dividend policy following the
completion of its annual results and the financial forecasts for the coming
period, the Board concluded that a further buy-back programme of up the £50.0
million, initially to be held in treasury, was appropriate, and this will
commence following the completion of the initial £40.0 million. In this way,
the Group seeks to balance the expectations of different investor groups,
while maintaining a strong capital position.
Any purchases made under either of these programmes will be announced through
the Regulatory News Service ('RNS') of the London Stock Exchange on the day of
the transaction.
The Board has affirmed the existing dividend policy going forward, subject to
an assessment of prevailing conditions at the time, but noted that, given the
unusual factors affecting the 2021 distribution, any interim dividend declared
for 2022 would not necessarily bear the normal relation to the preceding final
distribution.
3.4 CAPITAL OUTLOOK
The Group's current and forecast capital position is kept under regular
review, in light of the level and form of capital demanded by current
business, regulatory and economic conditions, as well as the Group's strategic
objectives.
The capital and liquidity position of the Group had strengthened through the
year. The Group's operations increased the capital balance, the Tier-2
issuance has been replaced at a lower cost and the positive result of the
regulatory review of the Group's capital management systems has resulted in a
lowering of the minimum capital requirement.
The Group ends the year well capitalised, even after the resumption of
distributions to shareholders in the form of dividends and buy-backs, and
allowing for the return of CCyB requirements and withdrawal of IFRS 9 reliefs
in the longer term. This position is both prudent and sustainable and helps
ensure the viability of the business for the benefit of all stakeholders.
4 FINANCIAL RESULTS
The Group's trading performance before impairment charges in the year ended 30
September 2021 highlights the level of progress towards its strategic
objectives, in spite of the impact of the Covid pandemic on the UK economy and
the necessary steps taken to address this. Income and margins both increased,
generally in line with expectations.
As the UK economy began to open up towards the end of the year, and the level
of the effectiveness of the UK's vaccination programme became evident, the
assumptions underlying the Group's impairment provisioning were revisited,
resulting in a release of provision. However the Group remains well provided
in the face of what remains an uncertain economic outlook.
These factors leave the Group's results significantly improved, year-on-year,
with underlying profit (Appendix A) for the year, at £194.2 million, 61.8%
higher than for the preceding twelve months (2020: £120.0 million), with a
provision release of £4.7 million (2020: charge of £48.3 million), unwinding
some of the previous year's Covid-related impacts. On the statutory basis,
which also includes the impact of fair value gains on hedging, profit before
tax increased 80.5% to £213.7 million, the largest pre-tax profit the Group
has ever recorded (2020: £118.4 million).
Earnings per share increased by 81.1% to 65.2 pence (2020: 36.0 pence) on the
statutory basis, and by 62.5% to 59.3 pence excluding the effect of the fair
value gains (2020: 36.5 pence) (Appendix A).
4.1 CONSOLIDATED RESULTS
CONSOLIDATED RESULTS
For the year ended 30 September 2021
2021 2020
£m £m
Interest receivable 484.2 491.7
Interest payable and similar charges (173.7) (213.6)
Net interest income 310.5 278.1
Net leasing income 3.5 3.0
Other income 10.9 14.0
Total operating income 324.9 295.1
Operating expenses (135.4) (126.8)
Provisions for losses 4.7 (48.3)
194.2 120.0
Fair value net gains / (losses) 19.5 (1.6)
Operating profit being profit on ordinary activities before taxation
213.7 118.4
Tax charge on profit on ordinary activities (49.2) (27.1)
Profit on ordinary activities after taxation 164.5 91.3
2021 2020
Dividend - rate per share for the year 26.1p 14.4p
Basic earnings per share 65.2p 36.0p
Diluted earnings per share 63.0p 35.6p
Income
The Group's total operating income in the year increased by 10.1% to £324.9
million (2020: £295.1 million). Net interest income increased in the year by
11.7% to £310.5 million (2020: £278.1 million). Part of this increase was a
result of growth in the average loan book in the year, 4.9% higher at
£13,017.0 million (2020: £12,408.7 million) (Appendix B), but the business
also generated a 15 basis point increase in net interest margin ('NIM') for
the year.
NIM in the year ended 30 September 2021 was 239 basis points (2020: 224 basis
points) (Appendix B). Each of the Group's segments showed improved NIM in the
period as a result of yield management activities in the business areas,
coupled with tighter funding costs. Excluding the impact of the declining Idem
Capital business, NIM increased by 19 basis points, from 209 basis points in
2020, to 228 basis points in the current year.
The progression of the Group's NIM, including and excluding the Idem Capital
division, over the past five years is set out below.
Total Excluding
Idem Capital
Basis points Basis points
Year ended 30 September
2021 239 228
2020 224 209
2019 229 192
2018 219 153
2017 213 141
Other operating income was £14.4 million for the year, with the reduction
from the £17.0 million reported in 2020 principally representing a reduction
in income from non-core servicing contracts.
Costs
The Group's operating expenses for the year were £135.4 million, increasing
by 6.8% year-on-year (2020: £126.8 million). The majority of the increase is
attributable to charges for share-based payments (including related National
Insurance 'NI' provision) which increased by £8.7 million, following a low
charge in 2020 when Covid impacted on vesting expectations and depressed the
Group's share price, on which the NI provision calculation is based.
The Group's average number of employees increased to 1,426 for the period, an
increase of 2.9% over 2020 (2020: 1,385), generating an increase in
non-share-based employment costs of 3.0%.
Costs unrelated to employment reduced in the year. The administration cost of
the Group's outsourced savings deposits is determined by reference to the
balance outstanding and increased by £0.5 million in the year, as a result
of the 18.4% year-on-year growth in the Group's savings balance. These
increases were offset by reductions in other areas, including travel and
accommodation and office running costs, which reflect the direct impacts of
the pandemic and of the associated lockdowns through much of the year.
Despite the impact of Covid, the Group has continued to invest in the
development of systems to improve customer service and operational efficiency.
Significant improvements were delivered to capabilities in the retail deposit
business and new functionality was introduced to the SME lending business.
Much of the Group's IT systems and infrastructure development is carried out
by its experienced in-house resource, and the Group has therefore tended to
capitalise less software than might be seen elsewhere in the sector, with more
costs being taken immediately to profit. During the period £0.7 million of
software was capitalised (2020: £1.0 million).
The Group's IRB project made further progress through the period, with the
second stage of the application for buy-to-let submitted in March 2021. Costs
for the year include expenditure of around £1.3 million on this project,
relating to both internal resources and external advice.
The progress of the Group's cost:income ratio over the last five years is set
out below.
Underlying Idem excluded Statutory
% % %
Year ended 30 September
2021 41.7 42.8 41.7
2020 43.0 44.9 43.0
2019 42.1 48.5 40.7
2018 40.6 54.2 37.8
2017 40.5 55.6 40.5
Cost:income reduced in the year as a result of income rising faster than
costs, as described above.
The Group considers that the ongoing management of costs is key to the
achievement of its operational strategy and seeks to enhance
cost-effectiveness from efficiencies and scale, with targeted investment in
people and systems. However, the costs of these investments, coupled with new
business initiatives and increasing regulatory expectations mean that the
achievement of a sustainably lower ratio is a longer-term goal.
Impairment provisions
The Group's Expected Credit Loss ('ECL') evaluation at the year end has
resulted in a net release of impairment provision for the year of £4.7
million (2020: charge of £48.3 million). This movement arises from a careful
consideration of the factors impacting the Group's loan portfolio, including
the progress and impact of the Covid pandemic, both generally and on
particular customers, and requires a significant exercise of judgment.
The progress of the impairment charge and cost of risk in the three years
since the introduction of IFRS 9 in 2019 is set out below.
(Release) / charge Cost of risk
£m %
Year ended 30 September
2021 (4.7) (0.04)
2020 48.3 0.39
2019 8.0 0.07
The high level of provisions in 2020 arose as the initial impact of the Covid
pandemic was recognised, attempting to represent a weighted average expected
loss based on many plausible outcomes of significantly varying severity. This
exercise was skewed by the natural asymmetry of provision for secured lending
- increased stress will, on average, increase loss more than decreased stress
reduces it.
The ongoing development of the pandemic since 30 September 2020 has differed,
to a greater or lesser degree, from the scenarios advanced by commentators at
the year end, but has generally been more benign, particularly following the
rollout of the UK vaccination programme.
To date, little of the provision established at the previous year end has been
utilised in writing off defaulted accounts, nor have arrears or enforcement
actions generally seen significant increases. However, credit issues, some
significant, have been identified with a small number of customers and the
Group remains cautious on the future prospects of those loans for which
provision is being carried. Support schemes from the UK Government, including
furlough support to households and businesses, remain in place and, as at 30
September 2021, levels of CBILS and BBLS loans where customers have so far
been required to make repayments have been low. This means that significant
uncertainty as to the future behaviour of both directly and indirectly
supported customers still exists.
At 30 September 2021, therefore, the Group had to consider whether sufficient
hard evidence of both customer performance and a sustainable improvement in UK
macro-economic conditions was available to justify a reduction in provision
levels, and whether factors existed that suggested that its statistical
impairment models might not be able to fully interpret current economic
conditions.
Payment holidays and outcomes
The Group offered payment relief to a significant number of its customers
during the initial period of the pandemic. Most of these came to an end before
the previous year end on 30 September 2020, but some continued into the
current financial year. By 30 September 2021, the number of the Group's
customers remaining on these arrangements was minimal, with the requirement to
make monthly payment arrangements back in place.
The post-relief behaviour in the Group's principal class, buy-to-let
mortgages, at 31 October 2021 is summarised in the table below. This
highlights, separately for accounts which did not receive payment holidays,
those which received a single three month relief and those which had extended
relief, the relative change between the October 2021 arrears position and the
29 February 2020, pre-Covid position.
No relief Single relief only Extended relief Total
£ billion £ billion £ billion £billion
Balance 9.24 1.39 0.74 11.37
Proportion 81.2% 12.2% 6.6% 100.0%
% with arrears deterioration 0.3% 0.8% 5.2% 0.7%
% with arrears improvement 0.4% 0.9% 7.1% 0.9%
Payment holiday status (31 October 2021)
Whilst the overwhelming majority of accounts which had been granted relief
have since returned to a fully paying status, there has been materially more
arrears volatility amongst those loans where extensions were granted, both
worsening and improving. This generally increased level of volatility for the
portfolio has resulted in management identifying such accounts as, on the
whole, riskier than average and transferring accounts with extended payment
holidays from Stage 1 to Stage 2 for impairment purposes.
Performance across the books has been generally strong, with arrears metrics
and loss experience broadly in line with pre-pandemic experience, while
external credit measures, such as credit bureau information have also remained
positive. However, due to government interventions and lender forbearance
across the sector, it is unclear whether these measures are fully
representative of underlying credit quality.
From the Group's customer surveys and interactions with its customers it is
clear that while many customers may have taken payment reliefs for
precautionary reasons, these accounts may have been able to perform due to
external support. Examples of this might include tenants of buy-to-let
landlords accessing furlough payments to meet rent demands and SME customers
using drawings under CBILS and BBLS schemes to meet day-to-day payments. These
reliefs would still have an impact at the end of the financial year, but have
a limited time scale and the current level of performance may not be fully
representative of the true underlying credit position.
As a result, management have maintained the approach of critically assessing
the outputs of business-as-usual provisioning methodologies to ensure all
elements of credit quality in the portfolio are adequately addressed. This
approach has been taken throughout the Covid crisis and has resulted in
substantial overlays to model outputs.
Multiple economic scenarios and impacts
While there is somewhat more consensus on the likely direction than at the
previous year end, the setting of economic scenarios for the purposes of IFRS
9 remains complex. The broad thrust of economic data for the UK over the past
six months has been positive, but this has been in a period where government
interventions have continued and there is continuing uncertainty over the
direction the economy will take once these begin to be withdrawn, with
potentially radically different medium term outcomes.
The approach to setting economic scenarios for IFRS 9 impairment at 30
September 2021 is broadly aligned to that used at the half year. The Group has
adopted a two-part approach
· the three main scenarios, central, upside and downside, were derived
as they would be at a 'normal' year end with the central scenario based on
public forecasts and the upside and downside scenarios more benign or severe
variants of this. This follows the general sentiment towards the UK economy,
assuming a continuation of the easing of Covid restrictions and no significant
impact from a new wave of infections.
· The severe scenario has been set to represent a potential negative
outturn, either for the economy, for the pandemic, or for both. This is
largely based on the Bank of England's stress testing scenarios, but with a
less optimistic outlook on house prices, the variable which has the most
significant impact on the value of the Group's ECLs. This scenario models a
radically different future course for the UK, which is plausible and
potentially has a very different impact on the Group's customers.
The weightings applied to each scenario have been held at those used at both
30 September 2020 and 31 March 2021, in the light of the continuing economic
uncertainty described above. The forecast economic assumptions within each
scenario, and the weightings applied, are set out in more detail in note 11.
To illustrate the impact of these scenarios, the impairment provision at 30
September 2021 before post‑model adjustments ('PMA's) has been recalculated,
weighting each of the central scenario and the severe scenario at 100%, with
the results shown below.
Provision before PMAs Cover ratio
£m
Weighted average 46.0 0.34%
Central scenario 33.3 0.25%
Severe scenario 86.7 0.64%
The level of provisions calculated by the Group's models are lower than might
be expected, given the economic conditions. The Group has therefore considered
the extent to which this is due to weaknesses in the modelling approach, and
should be corrected by PMAs.
Post-model adjustments
It is important to note that the impairment model focusses principally on the
impact of future economic changes on the portfolio. Where accounts are
currently only being kept from defaulting by external short-term support
measures they may still default when these are removed, despite an improved
economic climate. The models may also fail to fully allow for longer-term
damage caused to particular industries or customers' businesses by the
pandemic.
It is also clear that positive movements in economic indicators such as house
prices, unemployment and UK Gross Domestic Product ('GDP'), both in actual and
forecast terms have had a positive impact on the modelled outputs for cases
benefitting from support measures without any broader evidence of improvement
in the underlying credit quality of the customer balances being available.
Therefore the Group applies PMAs, based on its experience and its
understanding of current customer positions, to allow for the potential for
losses in such cases not being identified by the modelling approach.
In order to size the requirement for PMAs across the loan book the Group has
considered, on a portfolio-by-portfolio basis the extent to which modelled
provisions diverge from long-run experience and the appropriateness of such
differences given the underlying economic environment at the period end. All
available external information on general customer performance was analysed
and the impact of the potential take-up of government support and other
reliefs was assessed. The Group also considered whether there were any issues
of post-Covid scarring applying to any particular industry.
Notwithstanding this data analysis, the Group considered the potential for
apparently well-performing accounts to default, for the reasons set out above,
applying the market understanding and credit judgement of its experienced
team. The SME lending business was a particular area of focus, given the
prevalence of CBILS / BBLS funding in the customer base and the identification
of potential credit issues on certain large exposures.
The PMAs generated by this process, analysed by division are set out below.
2021 2020
£m
£m
Mortgage Lending 8.9 14.0
Commercial Lending 10.2 5.8
Idem Capital 0.3 -
19.4 19.8
These broader assessments were then allocated amongst accounts, focussing on
higher risk segments, or accounts where sufficient data existed to identify
any. Any accounts identified as at significant risk by the PMA process were
restaged appropriately.
The PMAs described above align the overall reported provision with current
loss expectations, given the inherent uncertainties on a macro and micro level
and based on the Group's internal monitoring of credit risk and customer
contact metrics. The Group maintains a cautious approach and will require
evidence as to customer behaviour once government interventions are scaled
back, before moving scenario weightings to more normal levels and revising PMA
methodologies so that actual emergent behaviour is reflected.
Ratios and trends
The impact of the economic scenarios adopted, together with PMAs adopted to
address uncertainties over the future performance of accounts, particularly
those which may have had payment relief or other government-backed support
during the pandemic, has resulted in the overall provision amounts and
coverage ratios set out below.
2021 2020 2019
£m £m £m
Calculated provision 46.0 62.0 41.9
PMAs 19.4 19.8 -
Total 65.4 81.8 41.9
Cover ratio
Mortgage lending 0.30% 0.44% 0.26%
Commercial lending 1.74% 1.85% 0.73%
Idem lending 1.27% 1.62% 1.12%
Total 0.49% 0.64% 0.34%
These ratios demonstrate the movement in the Group's overall provisioning back
towards more normal levels, without yet reaching the 0.34% coverage ratio seen
pre-pandemic at 30 September 2019. The extent to which coverage levels revert
to these levels will depend on future performance of the UK economy and on the
emergence of reliable evidence on the underlying credit quality of the Group's
loan assets.
Fair value movements
The fair value movements reported in the profit and loss account are a
consequence of the impact of market movements in spot and forward interest
rates on valuations of derivatives held as part of the Group's hedging
strategy. While all these instruments are part of economic hedging
relationships, their accounting treatment can result in the recognition of
substantial gains or losses, especially in periods of market fluctuation.
However, the Group remains appropriately hedged.
Movements in rates in 2021 led to a gain of £19.5 million being recognised.
While this is of far greater magnitude than the £1.6 million charge
recognised in the year ended 30 September 2020, it is comparable in size to
the charge of £15.1 million recognised during 2019. These fair value
movements reflect non-cash items and revert to zero over the lives of the
instruments involved. This, and the volatility of the balance, leads the Group
to consistently exclude this item from its measures of underlying results.
Tax
The effective tax rate applied to the Group's profits has increased marginally
from 22.9% in 2020 to 23.0% during 2021. While the standard tax rate applying
to the Group remained at 19.0%, the proportion of Group profits arising in
Paragon Bank and consequently attracting the banking surcharge, increased.
This caused the impact of the surcharge on the effective rate to increase from
338 basis points to 454 basis points in the current year, with other timing
differences representing the reconciling item to the actual charge.
The effective tax rates for both the current and preceding year have been
impacted by legislation for changes in future tax rates enacted in each
period, impacting on the carrying value of the Group's deferred tax assets and
liabilities.
While the Group's future profitability will be affected by the increase in the
basic rate of UK corporation tax to 25% legislated for in the year, the
proposed reduction in the bank surcharge to 3% and the increase in the profit
threshold at which it applies to £100.0 million should reduce the divergence
of the Group's effective rate of tax from the standard rate.
Results
Profit before tax for the year was 80.5% higher than in 2020 at £213.7
million (2020: £118.4 million), representing the Group's highest ever annual
profit. Profit after tax increased 80.2% to £164.5 million (2020: £91.3
million).
Basic earnings per share for 2021 were 65.2 pence (2020: 36.0 pence) and the
diluted measure was 63.0 pence per share (2020: 35.6 pence), driven by both
the increase in profit and share buy-backs in the year.
This result increased consolidated equity to £1,241.9 million (2020:
£1,156.0 million), representing a tangible net asset value of £4.34 per
share (2020: £3.90 per share) and a net asset value on the statutory basis of
£5.03 per share (2020: £4.57 per share) (Appendix D).
4.2 ASSETS AND LIABILITIES
SUMMARY BALANCE SHEET
30 September 2021
2021 2020 2019
£m £m £m
Investment in customer loans
Mortgage Lending 11,608.7 10,819.5 10,344.1
Commercial Lending 1,568.8 1,514.8 1,452.1
Idem Capital 225.2 297.1 389.9
13,402.7 12,631.4 12,186.1
Derivative financial assets 44.2 463.3 592.4
Cash 1,360.1 1,925.0 1,225.4
Intangible assets 170.5 170.1 171.1
Other assets 159.5 315.7 220.5
Total assets 15,137.0 15,505.5 14,395.5
Equity 1,241.9 1,156.0 1,108.6
Retail deposits 9,300.4 7,856.6 6,391.9
Other borrowings 4,451.4 6,229.7 6,648.4
Derivative financial liabilities 43.9 132.4 80.5
Pension deficit 10.3 20.4 34.5
Other liabilities 89.1 110.4 131.6
Total equity and liabilities 15,137.0 15,505.5 14,395.5
The Group's loan portfolio grew by 6.1% during 2021, with growth in both
Mortgage Lending and Commercial Lending. Balances in the Idem Capital division
continued to pay down. More detail on these movements is given in Section 1.
This increase, together with the Group's liquidity and capital policy,
determines its funding requirements and hence the level of its liabilities.
Funding structure and cash resources
The Group's funding reduced by 2.0% during the year, despite the growth in the
business, in response to the Group's cautious relaxation of the liquidity
strategy put in place in response to the pandemic and the refinancing of its
legacy securitisation transactions. The proportion represented by retail
deposits increased to 67.6% in accordance with the Group's long-term funding
strategy (2020: 55.8%). The Group's cash balance reduced by £564.9 million,
partly due to a £100.1 million reduction in cash held in securitisation
vehicles, following the collapse of schemes in the year, and partly due to
liquidity policy. Movements in funding balances are discussed in more detail
in Section 2.
Derivatives
The largest part of the movements in the derivative financial asset balance
reflects the retirement of the remaining Group's currency denominated floating
rate notes during the year and the consequent settlement of their related
hedging instruments. The value of these swaps in the 2020 balance sheet was
£445.3 million. These movements do not impact the Group's results.
Derivative assets used for interest rate hedging increased by £24.3 million,
while derivative liabilities decreased by £88.3 million, mostly as a result
of volatility in the year in market interest rate movements. These were
largely offset by a £104.2 million decrease in the hedging adjustment on
loans to customers, included in sundry assets above, and a £13.4 million
reduction in the adjustment on retail deposits, included in sundry
liabilities.
Pension obligations
The International Accounting Standard ('IAS') 19 valuation of the Group's
defined benefit pension scheme deficit reduced by £10.1 million in the
period. The principal factor in this reduction was the better than expected
performance of the scheme assets, as world markets began to recover from
losses suffered in the early stages of the pandemic. The deficit at 30
September 2021 stood at £10.3 million (2020: £20.4 million).
The Group's pension arrangements were restructured in the year to limit future
exposure. However this has no impact on obligations already accrued, or their
valuation.
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 deficit at 30 September 2021 was estimated at £1.0 million, a
reduction of £8.7 million in the period (2020: £9.7 million), representing
a 99.4% funding level (2020: 93.9%).
Other assets and liabilities
Sundry assets have decreased by £156.2 million over the year. This reduction
arose principally as a result of hedging transactions by movements in swap
rates which generated the £104.2 million movement in fair value hedging
referred to above and generated a £66.9 million decrease in Credit Support
Annex ('CSA') collateral deposits as a result of the increased value of
derivative liabilities.
Other movements included the recognition of a current tax liability, rather
than last year's asset of £5.7 million, with payments on account in the year,
based on the 2020 profit, being less than the calculated tax payable; an
increase of £8.6 million in mandatory CRD deposits at the Bank of England,
which are calculated based on the size of the Group's deposit base; and a
£4.3 million increase in property, plant and equipment, mostly related to the
recognition of a right of use ('RoU') asset in respect of the lease on the
Group's new London office.
Within sundry liabilities, which reduced by £21.3 million, the reduction in
the fair value adjustment of £13.4 million, as referred to above, and an
£11.8 million reduction in accrued investment interest payable resulting from
reduced interest rates, are offset by the £1.4 million tax creditor.
4.3 SEGMENTAL RESULTS
The underlying operating profits of the three segments described in the
Lending Review in Section A4.1 are detailed fully in note 2 and are
summarised below.
2021 2020
£m £m
Segmental profit
Mortgage Lending 213.8 154.3
Commercial Lending 75.7 45.9
Idem Capital 17.1 19.6
306.6 219.8
Unallocated central costs and other one-off items (112.4) (99.8)
194.2 120.0
The Group's central administration and funding costs, principally the costs of
service areas, establishment costs and bond interest have not been allocated.
Mortgage Lending
The Mortgage Lending division continued to perform strongly, with a strong
lending performance, a reduction in the proportion of older, lower yielding
assets and the Group's tighter overall funding costs combining to deliver a 15
basis point improvement in segmental NIM.
With the average mortgage book increasing by 6.0% in the year, this delivered
a 15.4% increase in net interest to £219.2 million (2020: £190.0 million).
The Group's mortgage accounts continued to perform well in the year,
generating a provision release of £5.9 million (2020: charge of £25.8
million). Despite this release, coverage levels remain in excess of pre-Covid
levels, in response to the uncertainties still prevalent in the UK economy.
Overall these factors drove a 38.6% increase in segment profit for the year,
to £213.8 million (2020: £154.3 million).
Commercial Lending
The contribution to profit of the Commercial Lending segment for the year was
£75.7 million, rising by 64.9% year-on-year (2020: £45.9 million), with the
improvement generated by improved NIM and a reduced provision charge.
The average loan balance increased by 3.9% in the year, but within this there
were important mix changes, with the average development finance balance
increasing by 9.1% and structured lending by 16.8%. Government-backed loans,
where margins are low, had increased to form 5.3% of the portfolio by the year
end.
The combination of these changes and tighter funding costs across the Group
saw divisional NIM increase from 5.53% to 6.13%, delivering a 15.1% increase
in net interest for the year to £94.5 million (2020: £82.1 million).
The impairment charge for the division reduced to £2.9 million (2020: £21.7
million). While the majority of accounts in the segment have continued to
perform satisfactorily, provisions have not yet been returned to pre-Covid
levels of cover, particularly in the SME lending business. As discussed under
'Impairment' above, many SME customers will potentially have been in receipt
of CBILS and BBLS funds or other government support for their business
operations. It is therefore too early to conclude that the current positive
performance is sustainable in the long-term as the impact of these
interventions fades. At the same time, a limited number of SME lending cases
with serious credit issues have already been identified and appropriately
provided for.
Idem Capital
The acquired Idem Capital loan portfolios continued to run off through the
year, with no new transactions completed. As a result the average loan balance
fell by 24.0%, following the trend of the previous year. Net interest
decreased by 22.6%, to £20.2 million (2020: £26.1 million), as a consequence
of this reduction.
While annualised NIM improved in the year to 7.74% (2020: 7.60%), reversing
the long-term decline in NIM is this segment, this was principally a result of
a Covid related interest adjustment in 2020 which depressed the margin in that
period. On an underlying basis NIM in the segment continues to move down as
higher margin portfolios pay off more rapidly than lower margin secured
assets.
The performance of the division's portfolios in the year has been
satisfactory, with cash flows in line with expectations. As a result of this
and the improving economic outlook an impairment provision write back of £1.7
million was recognised (2020: charge of £0.8 million).
Overall, these factors restricted the decline in the segment profit to 12.8%,
with a contribution of £17.1 million to the Group result (2020: £19.6
million).
5 OPERATIONS
Throughout the pandemic, while the Group's business has inevitably been
impacted by the impact of the virus on its people, customers and other
stakeholders, and by the changing official guidance and levels of restrictions
imposed in the UK, its priority has been to maintain business‑as‑usual, as
far as possible. This has largely been achieved and has played a large part in
both delivering the outstanding results for the period and in ensuring the
Group is well placed to take advantage of the recovering economy.
It is still too early to say how the experiences of the pandemic will impact
both the Group's business model and the way it operates in the longer term,
but, with most of the Group's people returning to its offices for at least
part of the week by the end of the year, the process of developing working
models for the future is well in hand.
5.1 OPERATIONS
The Group employs almost 1,450 people, with the majority normally based in its
Solihull offices. However, from the onset of the Covid pandemic approximately
90% of employees worked from home.
As a result, the Group was able to continue to provide a full service to
customers, intermediaries and other business partners throughout the various
lockdowns, while at the same time continuing to develop the business and
address issues arising from the pandemic, particularly in dealing with the
transition of customers from payment reliefs back to normal payment profiles.
For the vast majority of employees, working from home continued until
September 2021 when hybrid working pilots were introduced. New hires during
the period predominantly joined the Group working from home, with
technology-enabled induction and training plans providing them with the
support they needed to start their new roles. All employees are now trialling
flexible, hybrid ways of working.
The Group is proud that it has been able to continue to develop the business
through new systems, processes and products despite the restrictions on
contact, rather than simply mark time until the pandemic is concluded.
Instead, the year has seen the Group complete or progress a significant number
of technological, operational and regulatory projects. While long-term
projects to provide better technology for the development finance, SME lending
and savings operations continued in the period, other important projects
included enhancing the Group's cyber-security, developing its operational
resilience capabilities, putting in place contingency plans in case of
negative interest rates and preparing for the transition of LIBOR-linked
customer accounts to alternative reference rates. Overall, the year saw more
projects delivered than most recent comparable time periods.
The Group continues to envisage that its office hubs will remain important to
ensure that its culture and identity can continue to grow, that collaboration
is encouraged and that its peoples' sense of belonging is nurtured. To that
end it was pleased to sign a lease during the period on a new, more energy
efficient, central London base, bringing together its City-based staff,
replacing two existing locations, and providing a venue to interface with
stakeholders in the capital.
The Group has demonstrated agility and flexibility in how its resources have
been deployed throughout the pandemic, with short-term secondments being
introduced to support operational volumes resulting from initiatives such as
payment holidays.
Throughout the pandemic the Group's strategy has focussed on customer
outcomes, particularly for more vulnerable customers and it was very pleasing
that the Group's Financial Ombudsman Service ('FOS') complaints data shows no
significant increase in the period. The number of complaint cases reported to
FOS in the six months ended 30 June 2021, the most recent reporting period,
was 50 with an uphold rate of 34.0% while the number for the six months ended
31 December 2020 was 60, with an uphold rate of 43.3%.
Overall, the Group is very pleased with the way that its people and
infrastructure have continued to respond to the challenges posed by the
pandemic.
5.2 GOVERNANCE
Through most of the year the Group continued to operate on a pandemic footing,
with board and committee meetings being held remotely. However in June 2021,
at its annual offsite strategy conference, the Board was able to meet in
person for the first time since March 2020 and resumed physical board meetings
in September 2021.
The impact of the pandemic on all the Group's stakeholders has continued to be
an area of significant focus for the Board and the Group's ongoing response
has been thoroughly reviewed. The Group's 2021 AGM was held in February on a
closed basis, in accordance with UK Government guidance and the Board was
disappointed that shareholders could not be given the opportunity to attend in
person. However, arrangements were made to allow shareholders to view the
meeting online and they were encouraged to participate in the meeting by
completing and returning their proxy voting forms. The Board is hopeful that
the 2022 AGM, due to be held in March, can be conducted on a more normal
basis.
Throughout the year ended 30 September 2021 the Group continued to comply with
the principles and provisions of the UK Corporate Governance Code ('the
Code'). The Group adopted the 'comply and explain' approach under Provision 19
of the code to extend the Chair's tenure past nine years for succession
planning purposes and to ensure the appointment of a suitable replacement
Chair, as set out below.
Board of Directors
Fiona Clutterbuck's nine-year term on the Board came to an end in September
2021 since she was first appointed in 2012. However, the Board and
Nomination Committee considered Fiona's re-appointment beyond nine years and
agreed that, in the interests of succession planning purposes and to ensure a
smooth transition of duties to Fiona's successor, her appointment be extended
to September 2022. Fiona will therefore stand for re-election at the Annual
General Meeting in March 2022. A search process, led by Hugo Tudor, the Senior
Independent Director, is taking place and the results will be communicated to
stakeholders once the process is complete.
As announced in the Group's 2020 year end results announcement, Finlay
Williamson stepped down from the Board on 31 December 2020. Peter Hill, who
was appointed to the Board on 27 October 2020, assumed the role of Risk and
Compliance Committee Chair from 31 December 2020.
Peter Hill was appointed to the Board following a robust search and selection
process. He was Chief Executive Officer of Leeds Building Society, one of the
UK's largest building societies, from 2011 until his retirement in 2019,
having previously worked in a number of senior management positions within the
society. Peter is currently a non-executive director of Pure Retirement
Limited and chair of its risk committee and is also chair of the board at
Mortgage Brain. He brings with him a wealth of experience in financial
services and a proven track record in risk oversight, gained during his
executive and non-executive career.
As at 30 September 2021, the Board has three female directors, including the
Chair of the Board, out of a total of eight board members, forming 37.5% of
the Board.
A4.5.3 MANAGEMENT AND PEOPLE
The Group employs almost 1,450 people and during the period headcount has
grown by 3.6% (1.4% 2020), largely driven by the creation of new roles in
customer facing and risk and compliance functions.
People and development
During the period the Group's priority has continued to be the wellbeing of
employees and ensuring that they were provided with adequate support as the
pandemic continued. The Group's Wellbeing team has played an important role in
helping employees with their mental, physical, financial, and emotional
wellbeing over the year through numerous initiatives. Wellbeing pulse surveys
ensured that the Group continually monitored and responded to how employees
were coping with the pandemic and feedback continued to reflect that employees
were pleased with the quality and frequency of communications and how the
Group was responding to the ongoing situation.
No employees were placed on furlough or made redundant as a result of Covid,
and no use was made of the UK Government Coronavirus Job Retention Scheme in
the year.
The Group conducted an employee engagement survey in June 2021, its first
since December 2017; this produced a very strong set of positive indicators,
including an overall engagement score of 87% (2017: 81%) and an employee net
promoter score of +24 (2017: -3, industry norm: +21).
Retention of employees continues to remain high, with the attrition rate of
8.6% (2020: 10.4%) continuing to track below the national average. These high
levels of retention are further bolstered by 57% of employees achieving over 5
years' service, 13% achieving over 20 years with the Group and 5% achieving
over 30 years' service.
Employees continued to show flexibility during the year with many undertaking
secondments to different areas of the business to ensure that the Group
continued to meet the needs of its customers. Although the decision was made
to close the Second Charge Mortgage business in the year, all 26 affected
employees were offered alternative roles, with only a small number deciding to
take voluntary redundancy.
The Group maintains its accreditation from the UK Living Wage Foundation and
minimum pay continues to meet the levels set by the Foundation, while holiday
entitlement for all employees was enhanced during the year.
A new performance management approach was rolled-out, removing the need for a
formal annual appraisal and replacing this with more frequent and timely
conversations about performance throughout the year. This not only supports
individual performance and personal development, but also helps the Group to
effectively manage rising talent and fulfil its succession planning
objectives.
The third cohort of the Group's senior leadership development launched this
year with a further nine delegates. The programme is aimed at developing those
identified as successors for the executive management team and their direct
reports. During this year two members of this programme from previous cohorts
secured promotions within the Group. To support the Group's wider training
objectives, a new learning management system, Learn Amp was launched in
February. This hosts internally designed content alongside relevant
subscription material to ensure there is a broad, yet relevant range of
learning available for all employees to access.
Equality and diversity
The Group made significant progress on its diversity and inclusion strategy
during the year. Richard Rowntree, Managing Director - Mortgages, has taken on
the role of executive sponsor for equality, diversity and inclusion ('EDI')
and sponsors the Group's EDI Network which was launched in October 2020. The
Network has had a significant impact in a short space of time and has been
involved in the launch of a number of training offerings to all employees,
including new EDI eLearning, a new 'Inclusive Workplace' course and an
'Inclusive Leadership' course for all managers.
The Network also worked with Human Resources to run a diversity data capture
campaign in September 2021. 63% of employees completed a diversity profile on
the HR management system and the collation of this data from employees
provides the Group with an enhanced ability to monitor and improve the
diversity of the workforce going forward.
The Group has made further important commitments to improving the diversity of
its workforce by signing up to Business in the Community's Race at Work
Charter and becoming accredited as a Disability Confident employer. These
commitments complement the pledge the Group previously made to HM Treasury's
Women in Finance Charter in 2016.
The Group is pleased to report that is has now achieved each of its targets
set under the Women in Finance Charter in 2017, which focussed on female and
ethnic minority representation in the workforce and management. The Group is
currently considering the next phase of this initiative.
Details of progress against our targets can be found below.
Measure Target Sep 2021 Status
Female representation in senior management * 35% 38.7% Achieved
Females in workforce 50% 52.5% Achieved
Females as a percentage of employees receiving management career development 50% 52% Achieved
and leadership training
Managers from an ethnic minority background 10% 13.4% Achieved
Workforce on flexible working 10% 24.0% Achieved
Flexible working on a part time basis 50% 73.6% Achieved
* Senior management is defined using the FTSE Women Leaders definition, while
the ethnicity measure is based on those employees who self-identified.
To support its efforts to improve gender equality the Group has continued to
participate in the 'Women Ahead 30% Club' cross-company mentoring scheme. This
programme has proven popular with both mentors and mentees and a similar
scheme is being piloted for employees from ethnic minorities over the coming
year.
The Group welcomes the increasing interest in the diversity and inclusion
agenda from all its stakeholders and has participated in the recent FCA
Diversity and Inclusion survey.
Remuneration policy
The PRA remuneration rules applicable to the Group changed with effect from 1
October 2021, as the Group qualifies as a Proportionality Level 2 ('Level 2')
bank from that date, bringing it within the scope of more onerous rules. This
is a result both of the reduction in the asset threshold defining a Level 2
bank from £15 billion to £13 billion, announced by the PRA in December 2020,
and of the development of the rules themselves in response to Capital
Requirements Directive V ('CRD V').
A full gap analysis was performed against the updated rules, with affected
employees being identified and remuneration arrangements appropriately
adjusted. The majority of the significant changes required to remuneration
policies were prospectively approved at the 2020 AGM, with more minor changes
approved by the Remuneration Committee in the period.
The Group has also taken steps to assess the status of the small number of
off-payroll workers in the business and made necessary changes to ensure the
Group does not enter into engagements with workers who are paid through
personal service companies and similar arrangements and fall within IR35
status for tax purposes, avoiding the complexities of such arrangements.
5.4 SUSTAINABILITY
Sustainability, including resilience in the face of climate change risks, is
core to the Group's strategy: to focus on specialist markets, delivering
long-term sustainable growth and returns through a low risk and robust
business model. Sustainability influences every aspect of the Group's business
and means:
• Reducing the impact of the Group's operations on the environment
• Ensuring that the Group has a positive effect on our stakeholders
and communities
• Delivering sustainable lending through the design of products
offered and the choices of sectors in which to operate
The Group intends to publish a Responsible Business Report, its first
sustainability report, in December 2021, providing more detailed information
on its sustainability initiatives.
Climate change
Climate change is designated as a principal risk within the Group's Risk
Management Framework. Information and measures on climate change risks are
considered at board level and the Group's responses are considered within the
Board's overall strategy. These risks fall into two main groups:
• Physical risks (which arise from weather-related events)
• Transitional risks (which come from the adoption of a low-carbon
economy)
The Group has an internal Climate Change Forum, sponsored at executive level
and containing representation from across the business, to share information
on initiatives within business areas and to help develop the Group's overall
response.
During the year the first issuance was made under the Group's Green Bond
Framework, which was published in the year and which reflects the Group's
commitment to embed sustainability throughout its strategy, operations, and
product offerings including funding and capital raising activities. This was
the first issue of a green capital instrument by a bank in the UK. The
Sustainability Committee, established in the year under the oversight of the
Executive Committee, is responsible for the Framework.
Developments in sustainable products and climate-related exposures are
discussed in the relevant business reviews.
While the Group is not required to report on climate change risk and exposures
under the TCFD framework until its 2022 year end, it has signed up as a TCFD
supporter, and the disclosures made in respect of the year have been organised
using TCFD as a template.
Social engagement
Despite the difficulties for fund-raisers created by the pandemic, the Group's
Charity Committee raised over £43,000 for Macmillan Cancer Support, the
Group's chosen charity for the 2020 calendar year. For the 2021 calendar year
the Group is supporting the Alzheimer's Society with £22,000 raised by
September 2021.
The Group has begun to restart its community and volunteering initiatives as
pandemic restrictions cease, with employees looking forward to reengaging as
soon as possible.
5.4 RISK
The effective management of risk remains 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.
Inevitably the ongoing impacts of the pandemic have, and continue to be, a
priority for the Group and the longer-term implications are still unclear. The
Group continues to monitor closely the economic impacts, changes to lending
profiles, business volumes and customer credit risk as the immediate
restrictions necessitated by the pandemic are released. It is recognised that
the wider pandemic is still a global challenge and the possibility of further
waves and subsequent lockdowns may pose further issues during the coming
months.
However, given the work done over the last 18 months the Group feels it is
well-placed to respond to any further Covid-related disruption. The Group's
risk management framework has provided a robust mechanism to ensure that new
risks are promptly identified, assessed, managed and appropriately overseen
from a risk governance perspective.
The Group continues to focus on specific risk issues that have arisen as a
direct result of the pandemic. These include:
• Ensuring a Covid-safe return to office-based working and in the
longer-term trialling more flexible and hybrid ways of working which are core
to the strategy of attracting and retaining highly skilled employees, through
a Group-wide pilot scheme
• Continuing oversight of the impacts of government schemes and
initiatives implemented during the onset of Covid which necessitated rapid
deployment of resources and innovation in processes. A small number of
remaining payment holidays continue to be managed and where appropriate
forbearance solutions necessitated through Covid are tailored to individual
customer circumstances and that are aligned to regulatory guidance and
expectation
• Continuing oversight of risks related to the provision of
government-backed lending schemes to support businesses through Covid. Given
the effective implementation of process changes and underwriting decisions the
Group is positioned well to support any further government lending programmes
of this nature
Whilst Covid has clearly dominated the risk landscape since early 2020, the
Group has successfully continued to evolve and embed its risk management
framework. Good progress has been made in further developing its ability to
manage all categories of risk through the maturing ERMF.
The evolution of the Group's risk framework remains a core priority and
ongoing work is being undertaken to ensure it remains effective and
proportionate in line with the Group's strategic aspirations. Significant
recruitment has been undertaken during the year to bolster capability,
external benchmarking has been undertaken to validate work undertaken and
future plans, and a detailed roadmap for further development over the next 18
months has been agreed. Good progress has already been made in line with these
commitments.
Despite the pervasive impact of the pandemic, the Group has identified and
focussed on a number of non-Covid related strategic risk issues including:
· Strategy, operational and conduct-related risk implications of the
changes in product design, funding and operations required to transition all
LIBOR-linked customers to an alternative rate following the withdrawal of
LIBOR in December 2021
· Further embedding operational resilience capabilities which have
proven to be critical in handling the Covid situation. Importantly, lessons
learned from the handling of the pandemic have been incorporated into the
operational resilience framework together with continued refinement of the
overarching approach in line with regulatory expectation
· Addressing the impact of climate change on managing financial risks
and considering this as part of the wider ESG agenda across the Group
· Continuing to develop advanced models and embed the overarching model
risk framework to enhance credit risk management and support the Group's IRB
application process
· The impact of issues relating to defective cladding on high-risk
buildings where these form the security for mortgage loans. Underwriting
guidelines continue to be reviewed to ensure these remain in line with
emerging best practice
· Enhancing stress testing procedures to ensure the robustness of
capital and liquidity positions
· Ensuring effective cyber-security controls and a robust data
protection approach particularly as these evolve in response to changing
working practices
The Group continues to review its exposure to emerging developments in the
Brexit process as further clarity is received as to future dealings with the
EU. However, the end of the transition period on 31 December 2020 caused no
immediate impact to the Group. Whilst the Group does not have operations
outside the UK it has continued to review the capital, liquidity and
operational implications of the stresses which might be caused by the process.
In particular, it has continued to monitor the issues related to the supply of
essential goods which are causing shortages in a number of sectors. Whilst the
Group is not directly affected by these issues at present the Board is keeping
the situation under ongoing review as supply issues in areas such as building
materials and IT equipment could impact the Group's operations.
The principal challenges in the risk environment faced by the Group during the
coming year and moving forward into 2023 and beyond include:
· Management of risks arising from changes introduced in response to
Covid. With the ending of payment reliefs and the wider economic impacts of
the crisis beginning to emerge, there will be a need to ensure appropriate
treatment of ongoing arrears and the position of affected customers. Key to
this will be ensuring that the treatment of customers is fair and conduct
principles remain at the forefront of all interactions
· Addressing an increasing level of regulatory compliance standards,
where the Group is committed to ensuring it remains compliant in all areas of
its business. Particular focus in the Group is on ensuring that it meets
regulatory expectations in respect of its anti-money laundering and wider
financial crime control frameworks following the publication of the Dear CEO
letter in May 2021
· Risks associated with climate change remain an ever-present
challenge. The UK Government has confirmed its goal of net zero carbon by 2050
in November 2020 and the Group, and the rest of the financial services
industry, have a vital role to play in that commitment. As global strategies
continue to be refined the Group is looking to ensure both its operational
impacts, and the impact of its lending activities, explicitly consider climate
change risk as a core strategic driver
5.5 REGULATION
Paragon 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 continue to pose a significant risk for the
Group. The impact and pace of change necessitated through the ongoing
programme of revisions to the Basel supervisory regime continue to pose a
significant risk for the Group. These together with other potential regulatory
changes to the business are closely monitored through the comprehensive
governance and control structures in place.
Since March 2020, the impact of Covid has largely driven the priorities of
both UK and European regulators. The Group has continued to respond
effectively to these ongoing challenges despite short consultation and
implementation periods. All regulatory publications have been considered by
the Group, any implications identified and required changes implemented within
an appropriate timeframe. Over the last few months the Group has experienced
data requests from the FCA on arrears and forbearance increasing in both scale
and frequency. The Group continues to respond to these requests, and to focus
controls on the delivery of fair customer outcomes.
In addition to requirements introduced in response to Covid, the following
developments currently in progress have the greatest potential impact on the
Group:
· The Bank of England published a Consultation Paper ('CP') setting out
proposed changes to the Minimum Requirement for Own Funds and Eligible
Liabilities ('MREL') on 22 July 2021. The CP builds on the Discussion Paper
published in December 2020 and factors in the responses it received from
impacted banks and building societies. On 3 December 2021 the Bank of England
published a Statement of Policy based upon this consolidation. Although the
Group is not currently subject to MREL requirements, given its potential for
growth it may be required to issue MREL eligible instruments at some point in
the future.
· The Bank of England MPC confirmed in February 2021 that negative
interest rates still form part of its monetary policy toolkit. In response,
the PRA issued a 'Dear CEO' letter requesting firms initiate the
implementation of tactical solutions to process zero and negative rates by
August 2021. The Group has undertaken the analysis which confirmed that it is
well-placed to meet any operational requirements should rates fall to zero or
below
· The FCA's issued its consultation on "A New Consumer Duty" in May
2021. This seeks to set higher expectations for the standard of care provided
to customers and will result in new rules relating to communications, products
and services, customer service and price and value. The Group will continue to
engage with UKF throughout the consultation period to ensure adequate
preparation prior to the new rules coming into force
· The treatment of vulnerable customers continues to be a strong focus
for the FCA, with further guidance having been finalised in February 2021. The
Group continues to take its responsibilities in this regard seriously.
Significant work continues to be undertaken to revise existing procedures,
controls and training provisions to meet regulatory and industry expectations
· The FCA, PRA and Bank of England published their final rules and
guidance on building operational resilience in financial services on 29 March
2021. As expected, this did not differ significantly from consultation papers
and considerable work had already been undertaken by the Group to adhere to
the draft proposals. Good progress has been made against the roadmap and the
Group is well-positioned to meet the March 2022 policy implementation deadline
including setting of impact tolerances, embedding a scenario testing approach
and undertaking a self-assessment against the regulatory framework
· The Group continues to work towards embedding its approach to
managing climate-related financial risks by the end of 2021 in line with the
PRA expectations. A detailed plan of work has been developed which reflects
regulatory and wider requirements and will continue to be refined as new
thinking emerges. Managing the impacts of climate change is seen as a key
strategic priority for the Group and significant effort has been made during
2021 to incorporate climate risk considerations within the Group's ERMF. The
improved Governance which now includes the Sustainability Committee alongside
the existing executive level risk committees ensures comprehensive
consideration across all aspects of the business and ensure the Group is
well-positioned to address the emerging challenges
Certain regulations applying in the financial services sector only affect
entities over a certain size, which the Group might meet within its current
planning horizon. The Group considers whether and when these regulations might
apply to it in light of the growth implicit in its business plans and puts
appropriate arrangements in place to ensure it would be able to comply at that
point.
The Group continues to monitor the impact of Brexit on its operations, but the
longer-term regulatory changes are still unclear. With the extension of the
temporary transitional powers for the regulators until 31 March 2022 by HM
Treasury, regulatory obligations for firms generally remain the same. The Bank
of England has commenced the consultation process for the incorporation of the
prudential regulation regime previously set out in European legislation into
the PRA Rulebook.
However, further clarity has yet to be provided as to how the regulatory
landscape may evolve post March 2022. It is expected that the majority of
requirements will be directly transcribed although the PRA has indicated it is
willing to depart from EU text where this may enhance regulatory oversight in
the UK.
The governance and risk management framework within the Group continues to be
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.
Overall, the Group considers that it is well placed to address all the
regulatory changes to which it is presently exposed.
PRINCIPAL RISKS
We have identified a number of principal risks, arising from both the
environment in which we operate and our business model, which could impact our
ability to achieve our strategic priorities.
Capital
Insufficient capital to operate effectively and meet minimum requirements
Liquidity and funding
Insufficient financial resources to enable us to meet our obligations as they
fall due
Market
Changes in the net value of, or net income arising from, our assets and
liabilities from adverse movements in market prices
Credit
Financial loss arising from a borrower or counterparty failing to meet their
financial obligations
Model
Making incorrect decisions based on the output of internal models
Reputational
Failing to meet the expectations and standards of our stakeholders
Strategic
Changes to business model or environmental factors may lead to an
inappropriate or obsolete strategy or strategic plan
Climate change
Financial risks arising through climate change impacting the Group and our
strategy
Conduct
Poor behaviours or decision making leading to failure to achieve fair outcomes
for customers
Operational
Resulting from Inadequate or failed internal procedures, people, systems or
external events
Th Group has Enterprise Risk Management Framework ('ERMF') in place to ensure
that these risks are monitored and managed in accordance with the Group's risk
appetite.
DIRECTORS' RESPONSIBILITIES
The following statement of directors' responsibilities in respect of financial
statements is included in the Annual Report and Accounts of the Group for the
year ended 30 September 2021.
The directors are responsible for preparing this Annual Report, including the
consolidated and company financial statements in accordance with applicable
law and regulations.
Company law requires the directors to prepare consolidated financial
statements for the Group and separate financial statements for the Company in
respect of each financial year. In respect of the financial statements for the
year ended 30 September 2021, that law includes the Companies Act 2006 ('the
Companies Act'). That law requires the directors to prepare the consolidated
financial statements in accordance with IFRS in conformity with the
requirements of the Companies Act and they have also elected to prepare the
financial statements of the Company on the same basis.
In addition the UK Disclosure and Transparency Rules ('DTR') of the FCA
requires that the consolidated financial statements for the current year are
prepared in accordance with IFRS adopted pursuant to EU Regulation (EC) No
1606/2002 (the 'IAS Regulation') as it applies in the EU.
IAS 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 ('IASB') '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.
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.
In preparing each of the consolidated and company financial statements the
directors are also required to:
· select suitable accounting policies and apply them consistently
· make judgements and estimates that are reasonable, relevant and
reliable
· state whether the consolidated and company financial statements have
been prepared in accordance with IFRS in conformity with the requirements of
the Companies Act
· state whether the consolidated financial statements have been
prepared in accordance with IFRS as adopted by the EU pursuant to the IAS
Regulation
· assess the ability of the Group and the Company to continue as a
going concern, disclosing, as applicable, matters related to going concern
· use the going concern basis of accounting unless they intend to
liquidate the Company and / or the Group or to cease operation or they have no
realistic alternative to doing so
· 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
The directors are responsible for keeping adequate accounting records for the
Company that are sufficient to record and explain its transactions, disclose
with reasonable accuracy at any time its financial position and enable them to
ensure that its financial statements comply with the requirements of
the Companies Act.
They are responsible for the implementation of such internal control processes
as they deem necessary to enable the preparation of financial statements which
are free from material misstatements, whether due to fraud or error, and have
general responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Group and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the directors are also responsible for
the preparation of a strategic report, directors' report, directors'
remuneration report and corporate governance statement, which comply with that
law and those regulations.
The directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website
(www.paragonbankinggroup.co.uk). Legislation in the UK governing the
preparation and dissemination of financial statements differs from legislation
in other jurisdictions.
Confirmation by the Board of Directors
The Board of Directors currently comprises
F S Clutterbuck (Chair of the Board) B A Ridpath (Non-executive director)
N S Terrington (CEO) G H Yorston (Non-executive director)
R J Woodman (CFO) A C M Morris (Non-executive director)
H R Tudor (SID) P A Hill (Non-executive director)
Each of the directors named above confirms that, to the best of their
knowledge:
· The financial statements, prepared in accordance with applicable
accounting standards, 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 DTR, and includes a fair review of the development and
performance of the business and the consolidated position of the Group taken
as a whole, together with a description of the principal risks and
uncertainties that it faces
· The Annual Report (including the consolidated and company financial
statements), taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Group's
position, performance, business model and strategy
Approved by the Board of Directors as the persons responsible within the
Company
Signed on behalf of the Board
MARIUS VAN NIEKERK
Company Secretary
7 December 2021
PRELIMINARY FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
For the year ended 30 September 2021
2021 2021 2020 2020
Note £m £m £m £m
Interest receivable 3 484.2 491.7
Interest payable and similar charges 4
(173.7) (213.6)
Net interest income 310.5 278.1
Other leasing income 20.4 19.2
Related costs (16.9) (16.2)
Net operating lease income 3.5 3.0
Other income 5 10.9 14.0
Other operating income 14.4 17.0
Total operating income 324.9 295.1
Operating expenses (135.4) (126.8)
Provisions for losses 11 4.7 (48.3)
Operating profit before fair value items
194.2 120.0
Fair value net gains / (losses) 6 19.5 (1.6)
Operating profit being profit on ordinary activities before taxation 213.7 118.4
Tax charge on profit on ordinary activities (49.2) (27.1)
7
Profit on ordinary activities after taxation for the financial year
164.5 91.3
2021 2020
Note
Earnings per share
- basic 8 65.2p 36.0p
- diluted 8 63.0p 35.6p
The results for the current and preceding years relate entirely to continuing
operations.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2021
2021 2021 2020 2020
Note £m £m £m £m
Profit for the year 164.5 91.3
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Actuarial gain / (loss) on pension scheme 17
8.2 (7.4)
Tax thereon (0.9) 2.1
7.3 (5.3)
Items that may be reclassified subsequently to profit or loss
Cash flow hedge (losses) taken to equity 12 (3.0) (0.6)
Tax thereon 0.5 0.1
(2.5) (0.5)
Other comprehensive income / (expenditure) for the year net of tax
4.8 (5.8)
Total comprehensive income for the year
169.3 85.5
CONSOLIDATED BALANCE SHEET
30 September 2021
2021 2020 2019
Note £m £m £m
Assets
Cash - central banks 9 1,142.0 1,637.1 816.4
Cash - retail banks 9 218.1 287.9 409.0
Loans to customers 10 13,408.2 12,741.1 12,250.3
Derivative financial assets 12 44.2 463.3 592.4
Sundry assets 69.2 128.0 92.8
Current tax assets - 5.7 -
Deferred tax assets 14.4 6.2 6.2
Property, plant and equipment 70.4 66.1 57.3
Intangible assets 13 170.5 170.1 171.1
Total assets 15,137.0 15,505.5 14,395.5
Liabilities
Short term bank borrowings 0.3 0.4 1.0
Retail deposits 14 9,297.4 7,867.0 6,395.8
Derivative financial liabilities 12 43.9 132.4 80.5
Asset backed loan notes ('Notes') 15 516.0 3,270.5 4,419.4
Secured bank borrowings 15 730.0 657.8 787.5
Retail bond issuance 15 237.1 296.8 296.5
Corporate bond issuance 15 149.0 149.8 149.6
Central bank facilities 15 2,819.0 1,854.4 994.4
Sundry liabilities 16 90.7 100.0 112.7
Current tax liabilities 1.4 - 15.2
Retirement benefit obligations 17 10.3 20.4 34.5
Total liabilities 13,895.1 14,349.5 13,287.1
Called up share capital 18 262.5 261.8 261.6
Reserves 19 1,056.1 932.0 887.3
Own shares 20 (76.7) (37.8) (40.5)
Total equity 1,241.9 1,156.0 1,108.4
Total liabilities and equity 15,137.0 15,505.5 14,395.5
Approved by the Board of Directors on 7 December 2021.
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 2021
2021 2020
Note £m £m
Net cash generated by operating activities 22 878.1 1,028.7
Net cash (utilised) by investing activities 23 (4.3) (2.8)
Net cash (utilised) by financing activities 24 (1,438.6) (325.7)
Net (decrease) / increase in cash and cash equivalents
(564.8) 700.2
Opening cash and cash equivalents 1,924.6 1,224.4
Closing cash and cash equivalents 1,359.8 1,924.6
Represented by balances within:
Cash 9 1,360.1 1,925.0
Short term bank borrowings (0.3) (0.4)
1,359.8 1,924.6
CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY
For the year ended 30 September 2021
Year ended 30 September 2021
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 - - - - - 164.5 - 164.5
Other comprehensive income - - - - (2.5) 7.3 - 4.8
Total comprehensive income - - - - (2.5) 171.8 - 169.3
Transactions with owners
Dividends paid (note 21) - - - - - (54.6) - (54.6)
Own shares purchased - - - - - - (42.2) (42.2)
Exercise of share awards 0.7 1.4 - - - (3.3) 3.3 2.1
Charge for share based remuneration - - - - - 8.9 - 8.9
Tax on share based remuneration - - - - - 2.4 - 2.4
Net movement in equity in the year 0.7 1.4 - - (2.5) 125.2 (38.9) 85.9
Opening equity 261.8 68.7 50.3 (70.2) 2.5 880.7 (37.8) 1,156.0
Closing equity 262.5 70.1 50.3 (70.2) - 1,005.9 (76.7) 1,241.9
Year ended 30 September 2020
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 - - - - - 91.3 - 91.3
Other comprehensive income - - - - (0.5) (5.3) - (5.8)
Total comprehensive income - - - - (0.5) 86.0 - 85.5
Transactions with owners
Dividends paid (note 21) - - - - - (35.9) - (35.9)
Own shares purchased - - - - - - (5.2) (5.2)
Exercise of share awards 0.2 0.4 - - - (7.7) 7.9 0.8
Charge for share based remuneration - - - - - 2.7 - 2.7
Tax on share based remuneration - - - - - (0.3) - (0.3)
Net movement in equity in the year 0.2 0.4 - - (0.5) 44.8 2.7 47.6
Opening equity 261.6 68.3 50.3 (70.2) 3.0 835.9 (40.5) 1,108.4
Closing equity 261.8 68.7 50.3 (70.2) 2.5 880.7 (37.8) 1,156.0
NOTES TO THE FINANCIAL INFORMATION
For the year ended 30 September 2021
1. GENERAL INFORMATION
The financial information set out in the announcement does not constitute the
Company's statutory accounts for the years ended 30 September 2019, 30
September 2020 or 30 September 2021, but is derived from those statutory
accounts, which have been reported on by the Company's auditors. Statutory
accounts for the years ended 30 September 2019 and 30 September 2020 have
been delivered to the Registrar of Companies and those for the year ended 30
September 2021 will be delivered to the Registrar following the Company's
Annual General Meeting. The reports of the auditors in each case were
unqualified, did not draw attention to any matters by way of emphasis and did
not contain an adverse statement under sections 498(2) or 498(3) of the
Companies Act 2006.
Copies of the Annual Report and Accounts for the year ended 30 September 2021
will be distributed to shareholders in due course. Copies of this announcement
can be obtained from the Company Secretary, Paragon Banking Group PLC at 51
Homer Road, Solihull, West Midlands, B91 3QJ and on the Group's website at
www.paragonbankinggroup.co.uk.
These financial statements are presented in pounds sterling, which is the
currency of the economic environment in which the Group operates.
The remaining notes to the accounts are organised into four sections:
· Analysis - providing further analysis and information on the amounts
shown in the primary financial statements
· Employment costs - providing information on employee and key
management remuneration arrangements including share schemes and pension
arrangements
· Capital and Financial Risk - providing information on the Group's
management of operational and regulatory capital and its principal financial
risks
· Basis of preparation - providing details of the Group's accounting
policies and of how they have been applied in the preparation of the financial
statements
NOTES TO THE FINANCIAL INFORMATION - ANALYSIS
For the year ended 30 September 2021
The notes set out below give more detailed analysis of the balances shown in
the primary financial statements and further information on how they relate to
the operations, results and financial position of the Group.
2. SEGMENTAL INFORMATION
The Group analyses its operations, both for internal management reporting and
external financial reporting, on the basis of the markets from which its
assets are generated. The segments used are described below:
· Mortgage Lending, including the Group's buy-to-let, and
owner-occupied first and second charge lending and related activities
· Commercial Lending, including the Group's equipment leasing
activities, development finance, structured lending and other offerings
targeted towards SME customers, together with its motor finance business
· Idem Capital, including loan assets acquired from third parties and
legacy assets which share certain credit characteristics with them
Dedicated financing and administration costs of each of these businesses are
allocated to the segment. Shared central costs are not allocated between
segments, nor is income from central cash balances or the carrying costs of
unallocated savings balances.
Loans to customers and operating lease assets are allocated to segments as are
dedicated securitisation funding arrangements and their related cross-currency
basis swaps and cash balances.
All the Group's operations are conducted in the UK, all revenues arise from
external customers and there are no inter-segment revenues. No customer
contributes more than 10% of the revenue of the Group.
Financial information about these business segments, prepared on the same
basis as used in the consolidated accounts of the Group, is shown below.
Year ended 30 September 2021
Mortgage Commercial Lending Idem Unallocated Items Total Segments
Lending Capital
£m £m £m £m £m
Interest receivable 345.8 114.2 22.7 1.5 484.2
Interest payable (126.6) (19.7) (2.5) (24.9) (173.7)
Net interest income 219.2 94.5 20.2 (23.4) 310.5
Other operating income 6.1 8.0 0.3 - 14.4
Total operating income 225.3 102.5 20.5 (23.4) 324.9
Operating expenses (17.4) (23.9) (5.1) (89.0) (135.4)
Provisions for losses 5.9 (2.9) 1.7 - 4.7
213.8 75.7 17.1 (112.4) 194.2
Year ended 30 September 2020
Mortgage Lending Commercial Lending Idem Unallocated Items Total Segments
Capital
£m £m £m £m £m
Interest receivable 344.9 112.9 30.4 3.5 491.7
Interest payable (154.9) (30.8) (4.3) (23.6) (213.6)
Net interest income 190.0 82.1 26.1 (20.1) 278.1
Other operating income 6.5 9.9 0.6 - 17.0
Total operating income 196.5 92.0 26.7 (20.1) 295.1
Operating expenses (16.4) (24.4) (6.3) (79.7) (126.8)
Provisions for losses (25.8) (21.7) (0.8) - (48.3)
154.3 45.9 19.6 (99.8) 120.0
The segmental profits disclosed above reconcile to the Group results as shown
below.
2021 2020
£m £m
Results shown above 194.2 120.0
Fair value items 19.5 (1.6)
Operating profit 213.7 118.4
The assets of the segments listed above are:
2021 2020 2019
£m £m £m
Mortgage Lending 11,732.0 11,488.2 11,279.9
Commercial Lending 1,608.1 1,554.3 1,488.4
Idem Capital 225.2 297.1 389.9
Total segment assets 13,565.3 13,339.6 13,158.2
Unallocated assets 1,571.7 2,165.9 1,237.3
Total assets 15,137.0 15,505.5 14,395.5
An analysis of the Group's loan assets by type and segment is shown in note
10.
3. Interest receivable
2021 2020
£m £m
Interest receivable in respect of
Loans and receivables 440.0 440.4
Finance leases 40.4 44.3
Factoring income 2.3 2.4
Interest on loans to customers 482.7 487.1
Other interest receivable 1.5 4.6
Total interest on financial assets 484.2 491.7
The above interest arises from:
2021 2020
£m £m
Financial assets held at amortised cost 443.8 447.4
Finance leases 40.4 44.3
484.2 491.7
4. Interest payable and similar charges
Note 2021 2020
£m £m
On retail deposits 120.5 129.7
On asset backed loan notes 17.9 42.2
On bank loans and overdrafts 6.6 5.4
On corporate bonds 9.3 10.9
On retail bonds 15.4 18.5
On central bank facilities 2.2 4.5
On repurchase agreements 0.1 -
Total interest on financial liabilities 172.0 211.2
On pension scheme deficit 17 0.3 0.4
Discounting on contingent consideration 0.3 0.4
Discounting on lease liabilities 0.2 0.2
Other finance costs 0.9 1.4
173.7 213.6
All interest payable on financial liabilities relates to financial liabilities
carried at amortised cost.
5. OTHER INCOME
2021 2020
£m £m
Loan account fee income 5.1 5.7
Broker commissions 1.9 1.7
Third party servicing 3.5 5.0
Other income 0.4 1.6
10.9 14.0
All loan account fee income arises from financial assets held at amortised
cost.
6. FAIR VALUE NET Gains / (losses)
2021 2020
£m £m
Ineffectiveness of fair value hedges
Portfolio hedges of interest rate risk
Deposit hedge (0.3) 0.2
Loan hedge 6.6 0.1
6.3 0.3
Ineffectiveness of cash flow hedges - -
Other hedging movements 9.9 (2.9)
Net gains / (losses) on other derivatives 3.3 1.0
19.5 (1.6)
The fair value net gain / (loss) represents the accounting volatility on
derivative instruments which are matching risk exposures on an economic basis,
generated by the requirements of IAS 39. Some accounting volatility arises on
these items due to accounting ineffectiveness on designated hedges, or because
hedge accounting has not been adopted or is not achievable on certain items.
The losses and gains are primarily due to timing differences in income
recognition between the derivative instruments and the economically hedged
assets and liabilities. Such differences will reverse over time and have no
impact on the cash flows of the Group.
7. Tax charge on profit on ordinary activities
Income tax for the year ended 30 September 2021 is charged at an effective
rate of 23.0% (2020: 22.9%), representing the best estimate of the annual
effective rate of income tax expected for the full year, applied to the
pre-tax income of the period.
The standard rate of corporation tax in the UK applicable to the Group in the
year was 19.0% (2020: 19.0%), based on currently enacted legislation. During
the year ended 30 September 2020, legislation was substantively enacted
reversing the reduction in the tax rate to 17.0% which had been due to come
into effect from April 2020. The effects of the increases in the standard rate
for the year ended 30 September 2020 from 18.0% to 19.0%, and the expected
rate in subsequent years from 17.0% to 19.0% on deferred tax balances were
accounted for in the year ended 30 September 2020.
During the current financial year, the UK Government enacted legislation
increasing the standard rate of corporation tax in the UK to 25.0% from April
2023. The impact of this change on deferred tax balances has been accounted
for in these accounts.
The increase in the effective rate of tax is principally attributable to the
increased proportion of the Group's profit earned in its banking subsidiary,
Paragon Bank PLC, and therefore subject to the banking surcharge.
8. Earnings per share
Earnings per ordinary share is calculated as follows:
2021 2020
Profit for the year (£m) 164.5 91.3
Basic weighted average number of ordinary shares ranking for dividend during 252.3 253.6
the year (m)
Dilutive effect of the weighted average number of share options and incentive 8.9 2.5
plans in issue during the year (m)
Diluted weighted average number of ordinary shares ranking for dividend during 261.2 256.1
the year (m)
Earnings per ordinary share - basic 65.2p 36.0p
63.0p 35.6p
- diluted
9. Cash and CASH EQUIVALENTS
'Cash and Cash Equivalents' includes current bank balances, money market
placements and fixed rate sterling term deposits with London banks, and
balances with the Bank of England. It is analysed as set out below.
2021 2020 2019
£m £m £m
Deposits with the Bank of England 1,142.0 1,637.1 816.4
Balances with central banks 1,142.0 1,637.1 816.4
Deposits with other banks 218.1 287.9 409.0
Balances with other banks 218.1 287.9 409.0
Cash and cash equivalents 1,360.1 1,925.0 1,225.4
Not all of the Group's cash is immediately available for its general purposes,
including liquidity management. Cash received in respect of loan assets funded
through warehouse facilities and securitisations is not immediately available,
due to the terms of those arrangements.
Cash held by the Trustee of the Group's employee share ownership plan ('ESOP')
may only be used to invest in the shares of the Company, pursuant to the aims
of that plan.
The total consolidated 'Cash and Cash Equivalents' balance may be analysed as
shown below:
2021 2020 2019
£m £m £m
Available cash 1,236.5 1,701.1 872.1
Securitisation cash 123.3 223.4 353.1
ESOP cash 0.3 0.5 0.2
1,360.1 1,925.0 1,225.4
Cash and cash equivalents are classified as Stage 1 exposures (see note 11)
for the purposes of impairment provisioning. The probabilities of default have
been assessed to be so low as to require no significant impairment provision.
10. loans to customers
Note 2021 2020 2019
£m £m £m
Loans to customers 13,402.7 12,631.4 12,186.1
Fair value adjustments from portfolio hedging 64.2
5.5 109.7
13,408.2 12,741.1 12,250.3
The Group's loans to customers at 30 September 2021, analysed between the
segments described in note 2 are as follows:
Mortgage Lending Commercial Lending Idem Total
Capital
£m £m £m £m
At 30 September 2021
First mortgages 11,460.6 - - 11,460.6
Consumer loans 148.1 - 220.9 369.0
Motor finance - 224.9 4.3 229.2
Asset finance - 468.7 - 468.7
Development finance - 608.2 - 608.2
Other commercial loans - 267.0 - 267.0
Loans to customers 11,608.7 1,568.8 225.2 13,402.7
At 30 September 2020
First mortgages 10,636.9 - - 10,636.9
Consumer loans 182.6 - 281.6 464.2
Motor finance - 256.9 15.5 272.4
Asset finance - 478.0 - 478.0
Development finance - 609.0 - 609.0
Other commercial loans - 170.9 - 170.9
Loans to customers 10,819.5 1,514.8 297.1 12,631.4
At 30 September 2019
First mortgages 10,172.5 - - 10,172.5
Consumer loans 171.6 - 352.3 523.9
Motor finance - 281.3 37.6 318.9
Asset finance - 492.2 - 492.2
Development finance - 506.5 - 506.5
Other commercial loans - 172.1 - 172.1
Loans to customers 10,344.1 1,452.1 389.9 12,186.1
11. IMPAIRMENT PROVISIONS ON LOANS TO CUSTOMERS
This note sets out information on the Group's impairment provisioning under
IFRS 9 for the loans to customers balances set out in note 10, including both
finance leases, accounted for under IFRS 16, and loans held at amortised cost,
accounted for under IFRS 9, as both groups of assets are subject to the IFRS 9
impairment requirements.
The disclosures are set out under the following headings:
· Basis of provision
· Impairments by stage and division
· Movements in impairment provision in the year
· Impairments charged to income
· Economic inputs to provision calculations
· Sensitivity analysis
(a) Basis of provision
IFRS 9 requires that impairment is evaluated on an ECL basis. ECLs are based
on an assessment of the probability of default ('PD') and LGD, discounted to
give a net present value. The estimation of ECL should be unbiased and
probability weighted, considering all reasonable and supportable information,
including forward-looking economic assumptions and a range of possible
outcomes. The provision may be based on either twelve month or lifetime ECL,
dependent on whether an account has experienced a significant increase in
credit risk ('SICR').
The Group's process for determining its provisions for impairments is
summarised below. This includes:
i. The methods used for the calculation of ECL
ii. How it defines SICR
iii. How it defines default
iv. How it identifies which loans are credit impaired, as defined by IFRS
9
v. How the ECL estimation process is monitored and controlled
vi. How the Group develops and enhances the models it uses in the ECL
estimation process
vii. How the Group uses PMA's to ensure all elements of credit risk are
fully addressed
i) Calculation of expected credit loss ('ECL')
For the majority of the Group's loan assets, the ECL is generated using
statistical models applied to account data to generate PD and LGD components.
PD on both a twelve month and lifetime basis is estimated based on statistical
models for the Group's most significant asset classes. The PD calculation is a
function of current asset performance, customer information and future
economic assumptions. The structure of the models was derived through analysis
of correlation in historic data, which identified which current and historical
customer attributes and external economic variables were predictive of future
loss. PD measures are calculated for the full contractual lives of loans with
the models deriving probabilities that, at a given future date, a loan will be
in default, performing or closed. The Group utilised all reasonably available
information in its possession for this exercise.
LGD for each account is derived by calculating a value for exposure at the
point of default (which will include consideration of future interest, account
charges and receipts) and reducing this for security values, net of likely
costs of recovery. These calculations allow for the Group's potential case
management activities. This evaluation includes the potential impact of
economic conditions at the time of any future default or enforcement. The
derivation of the significant assumptions used in these calculations is
discussed below.
In certain asset classes a fully modelled approach is not possible. This is
generally where there are few assets in the class, where there is insufficient
historical data on which to base an analysis or where certain measures, such
as days past due are not useful (including cases where the loan agreement does
not require regular payments of pre-determined amounts). In these cases, which
represent a small proportion of the total portfolio, alternative approaches
are adopted. These rely on internal credit monitoring practices and
professional credit judgement.
Notwithstanding the mechanical procedures discussed above, the Group will
always consider whether the process generates sufficient provision for
particular loans, especially large exposures, and will provide additional
amounts as appropriate.
In certain asset classes a fully modelled approach is not possible. This is
generally where there are few assets in the class, where there is insufficient
historical data on which to base an analysis or where certain measures, such
as days past due are not useful (such as accounts where the loan agreement
does not require regular payments of pre-determined amounts). In these cases,
which represent a small proportion of the total portfolio, alternative
approaches are adopted. These rely on internal credit monitoring practices and
professional credit judgement.
Notwithstanding the mechanical procedures discussed above, the Group will
always consider whether the process generates sufficient provision for
particular loans, especially large exposures, and will provide additional
amounts as appropriate.
In extreme or unprecedented economic conditions, such as the Covid pandemic,
it is likely that mechanical models will be less predictive of outcomes as the
historical data used for modelling will be insufficiently representative of
present conditions. In these circumstances, management carefully review all
outputs to ensure provision is adequate.
At 30 September 2021 the impact of reduced economic activity in the UK from
the Covid crisis had not yet been evidenced in customer credit performance and
defaults, due to the lagging effect of government policy interventions. Where
customers were given payment reliefs, arrears and adverse credit indicators
were not recorded by the Group or other lenders, meaning that both internal
credit metrics and external credit bureau data might not accurately reflect
the customer's credit position leading to modelled PDs being underestimated.
During the year the trend of economic performance has been generally upward,
albeit from a low level, meaning that the principal economic indicators are
more positive than at 30 September 2020, though still more depressed than
pre-Covid levels. The economic forecasts indicate continued recovery, but this
upward trend will reduce calculated probabilities of default, even where the
absolute levels of metrics remain low and where underlying credit issues on
accounts have not emerged, which may result in rising defaults as government
support initiatives unwind.
These factors have led management to conclude that in the current economic
conditions, the Group's models do not fully represent loss expectations, and
PMA's have been made to compensate for these weaknesses.
ii) Significant Increase in Credit Risk ('SICR')
Under IFRS 9, SICR is not defined solely by account performance, but on the
basis of the customer's overall credit position, and this evaluation should
include consideration of external data. The Group's aim is to define SICR to
correspond, as closely as possible, to that population of accounts which are
subject to enhanced administrative and monitoring procedures operationally.
The Group assesses SICR in its modelled portfolios primarily on the basis of
the relative difference in an account's lifetime PD between origination and
the reporting date. The levels of difference required to qualify as an SICR
may differ between portfolios and will depend, to some extent, on the level of
risk originally perceived and are monitored on an ongoing basis to ensure that
this calibrates with actual experience.
It should be noted that the use of the current PD, which includes external
factors such as credit bureau data, means that all relevant information in the
Group's hands concerning the customers' present credit position is included in
the evaluation, as well as the impact of future economic expectations.
For non-modelled portfolios, the SICR assessment is based on the credit
monitoring position of the account in question and for all portfolios a number
of qualitative indicators which provide evidence of SICR have been considered.
In determining whether an account has an SICR in the Covid environment the
granting of Covid‑related reliefs, including payment holidays and similar
arrangements, may mean that an SICR may exist without this being reflected in
either arrears performance or credit bureau data. The Group has accepted the
advice of UK regulatory bodies that the grant of initial Covid relief did not,
of itself, indicate an SICR, but has carefully considered internal credit and
customer data to determine whether there might be any accounts with SICR not
otherwise identified by the process.
When reviewing the subsequent payment patterns of accounts that have been
granted Covid-related reliefs, it has been evident that there is higher
payment volatility (both in terms of account improvement and deterioration) in
these cases, particularly in cases where an extension to the payment holiday
has been granted. This indicates an increased credit risk, though the impact
is not significant in scale in all cases. As a result of this analysis the
accounts of customers who have been granted extended payment reliefs have been
placed in Stage 2, regardless of other indicators. This aligns the Group's
approach to regulatory guidance which suggested that while initial payment
reliefs should not automatically be taken as an indication of an SICR, an
extension to such a relief was more likely to be so.
The effect of this override is to transfer accounts with gross balances of
£599.8m (2020: £576.3m) to Stage 2. The additional provision on transfer is
included within PMAs.
This overall approach remains consistent with that taken at 30 September 2020.
In reviewing account performance during the current year the Group has not yet
identified any positive evidence which would cause it to begin to unwind this
position. It will be reviewed going forward as other government economic
interventions are scaled back and the post-relief credit characteristics of
such accounts become more evident.
iii) Definitions of default
As the IFRS 9 definition of ECL is based on PD, default must be defined for
this purpose. The Group's definitions of default for its various portfolios
are broadly aligned to its internal operational procedures and the regulatory
definitions of default used internally. In particular the Group's receiver of
rent cases are defined as defaulted for modelling purposes as the behaviour of
the case after that point is significantly influenced by internal management
decisions.
IFRS 9 provides a rebuttable presumption that an account is in default when it
is 90 days overdue, and this was used as the basis of the Group's definition.
A combination of qualitative and quantitative measures were used in developing
the definitions. These include account management activities and internal
statuses.
iv) Credit Impaired loans
IFRS 9 defines a credit impaired account as one where an account has suffered
one or more events which have had a detrimental effect on future cash flows.
It is thus a backward-looking definition, rather than one based on future
expectations.
Credit impaired assets are identified either through quantitative measures or
by operational status. Designations of accounts for regulatory capital
purposes are also taken into account. Assets may also be assigned to Stage 3
if they are identified as credit impaired as a result of management review
processes.
All loans which are in the process of enforcement, from the point where this
becomes the administration strategy, are classified as credit impaired.
Loans are retained in Stage 3 for three months after the point where they
cease to exhibit the characteristics of default. After this point, they may
move to Stage 2 or Stage 1 depending on whether an SICR trigger remains.
All default cases are considered to be credit impaired, including all receiver
of rent cases and all cases with at least one payment more than 90 days
overdue, even where such cases are being managed in the expectation of
realising all of the carrying balance.
In order to provide better information for users, additional analysis of
credit impaired accounts has been presented below distinguishing between
probationary accounts, receiver of rent accounts, accounts subject to
realisation / enforcement procedures and long term managed accounts, all of
which are treated as credit impaired. While other indicators of default are in
use, the categories shown account for the overwhelming majority of Stage 3
cases.
v) Monitoring of ECL estimation processes
The Group's ECL models are compiled on the basis of the analysis of relevant
historical data. Before a model is adopted for use its operations and outputs
are examined to ensure that it is expected to be appropriately predictive and,
if it is an updated model, expected to be more predictive than any existing
model. Before a new model is adopted the changes and impacts will be
considered by the CFO, alongside any advice from the Group's independent model
review functions.
The performance of all models is reviewed on an ongoing basis, by senior
finance and risk management, including the CFO. Monitoring packs comparing
actual and predicted loss levels are produced at regular intervals, set on the
basis of the materiality of each model. The continuing appropriateness of
model assumptions is also reviewed as part of this process.
Models are revisited on a regular basis to ensure that they continue to
reflect the most recent data as the available information increases over time.
On a monthly basis all model outputs, model overlays and provisions calculated
for non-modelled books are reviewed by senior finance management including the
CFO in conjunction with the latest credit risk operational and economic
metrics to ensure that the impairment provision by assets type remains
appropriate. This exercise will be the subject of particular focus at the year
end and the half year.
This information is summarised for the Audit Committee on a biannual basis,
and they have regard to this data in forming their conclusions on the
appropriateness of provisioning levels.
vi) Model development
The models used by the Group are updated from time to time to allow for
changes in the business, developments in best practice and the availability of
additional data with the passing of time. During the year ended 30 September
2021 a major update to the buy-to-let PD model took place.
All revised models and model enhancements are carefully reviewed and tested
before adoption, and are subject to a governance process for their approval.
As a result of the reanalysis of updated historical data, the economic inputs
identified as most predictive of future PD performance were changed, with the
UK unemployment rate being substituted for UK GDP in the model as the
indicator of general UK economic activity levels.
The impacts of the adoption of the new PD model on the calculated provision
were not significant.
vii) Post Model Adjustments ('PMA's)
Where management has identified a requirement to amend the calculated
provision as a result of either model deficiencies or idiosyncratic behaviour
in part of the portfolio, PMAs are applied to the modelled outputs so that the
ECL recognised corresponds to expert judgement, taking into account the widest
possible range of current information, which might not be factored into the
modelling process.
In normal circumstances the Group's objective is to develop its modelling to
the point where the level of PMAs required is minimal, but in economic
conditions where previous relevant experience is limit or non-existent, as
with Covid, some form of PMA is always likely to be necessary.
The current model behaviour and the potential for unobserved credit issues
have meant that the requirement for such adjustments at 30 September 2021 was
significant. Evidence considered by management included internal performance
data, customer feedback, evidence on the wider economy and quantitative and
qualitative data and statements from industry, government and regulatory
bodies. These were combined to form a broad estimate of the level of provision
required across the Group.
The total amounts of PMAs provided across the Group are set out below by
segment.
2021 2020
£m £m
Mortgage Lending 8.9 14.0
Commercial Lending 11.2 5.8
Idem Capital 0.3 -
20.4 19.8
Other than the behaviour of extended payment relief cases noted above, this
analysis found no evidence of particular concentrations of credit risk below
portfolio level. Given this and the high level nature of the PMA exercise the
PMAs have been allocated on a broad brush basis to individual cases.
The Group will continue to monitor the requirement for these PMAs as the
economic situation develops and the impact of government interventions
recedes.
(b) Impairments by stage and division
IFRS 9 calculations and related disclosures require loan assets to be divided
into three stages, with accounts which were credit impaired on initial
recognition representing a fourth class.
The three classes comprise: those where there has been no SICR since advance
or acquisition (Stage 1); those where there has been an SICR (Stage 2); and
loans which are impaired (Stage 3).
· On initial recognition, and for assets where there has not been an
SICR, provisions will be made in respect of losses resulting from the level of
credit default events expected in the twelve months following the balance
sheet date
· Where a loan has experienced an SICR, whether or not the loan is
considered to be credit impaired, provisions will be made based on the ECLs
over the full life of the loan
· For credit impaired assets, provisions will also be made on the basis
of lifetime ECLs
For assets which were 'Purchased or Originated as Credit Impaired' ('POCI')
accounts (those considered as credit impaired at the point of first
recognition), such as certain of the Group's acquired assets in Idem Capital,
the carrying valuation is based on expected cash flows discounted by the EIR
determined at the point of acquisition.
An analysis of the Group's loan portfolios between the stages defined above is
set out below.
Stage 1 Stage 2 * Stage 3 * POCI Total
£m £m £m £m £m
30 September 2021
Gross loan book
Mortgage Lending 10,303.7 1,206.4 120.0 13.4 11,643.5
Commercial Lending 1,504.2 66.4 19.0 6.9 1,596.5
Idem Capital 92.5 6.3 25.3 104.0 228.1
Total 11,900.4 1,279.1 164.3 124.3 13,468.1
Impairment provision
Mortgage Lending (1.7) (10.2) (22.9) - (34.8)
Commercial Lending (12.9) (1.0) (13.6) (0.2) (27.7)
Idem Capital (0.4) (0.1) (2.4) - (2.9)
Total (15.0) (11.3) (38.9) (0.2) (65.4)
Net loan book
Mortgage Lending 10,302.0 1,196.2 97.1 13.4 11,608.7
Commercial Lending 1,491.3 65.4 5.4 6.7 1,568.8
Idem Capital 92.1 6.2 22.9 104.0 225.2
Total 11,885.4 1,267.8 125.4 124.1 13,402.7
Coverage ratio
Mortgage Lending 0.02% 0.85% 19.08% - 0.30%
Commercial Lending 0.86% 1.51% 71.58% 2.90% 1.74%
Idem Capital 0.43% 1.59% 9.49% - 1.27%
Total 0.13% 0.88% 23.68% 0.16% 0.49%
* Stage 2 and 3 balances are analysed in more detail below.
Stage 1 Stage 2 * Stage 3 * POCI Total
£m £m £m £m £m
30 September 2020
Gross loan book
Mortgage Lending 9,822.6 903.2 127.0 15.0 10,867.8
Commercial Lending 1,384.2 132.3 20.2 6.7 1,543.4
Idem Capital 122.9 9.9 28.9 140.3 302.0
Total 11,329.7 1,045.4 176.1 162.0 12,713.2
Impairment provision
Mortgage Lending (5.0) (12.6) (30.7) - (48.3)
Commercial Lending (17.0) (3.0) (8.2) (0.4) (28.6)
Idem Capital (0.2) (0.2) (4.5) - (4.9)
Total (22.2) (15.8) (43.4) (0.4) (81.8)
Net loan book
Mortgage Lending 9,817.6 890.6 96.3 15.0 10,819.5
Commercial Lending 1,367.2 129.3 12.0 6.3 1,514.8
Idem Capital 122.7 9.7 24.4 140.3 297.1
Total 11,307.5 1,029.6 132.7 161.6 12,631.4
Coverage ratio
Mortgage Lending 0.05% 1.40% 24.17% - 0.44%
Commercial Lending 1.23% 2.27% 40.59% 5.97% 1.85%
Idem Capital 0.16% 2.02% 15.57% - 1.62%
Total 0.20% 1.51% 24.65% 0.25% 0.64%
* Stage 2 and 3 balances are analysed in more detail below.
In terms of the Group's credit management processes, Stage 1 cases will fall
within the appropriate customer servicing functions and Stage 2 cases will be
subject to account management arrangements. Stage 3 cases will include both
those subject to recovery or similar processes and those which, though being
managed on a long-term basis, are included with defaulted accounts for
regulatory purposes. However, these broad categorisations may vary between
different product types.
POCI balances included in the Commercial Lending segment arise principally
from acquired businesses, where those assets were identified as credit
impaired at the point of acquisition when the acquired portfolios as a whole
were evaluated. Additional provision arising on these assets post-acquisition
is shown as 'Impairment Provision' above.
Idem Capital loans include acquired consumer and motor finance loans together
with legacy (originated pre-2010) second charge mortgage and unsecured
consumer loans. Legacy assets and acquired loans which were performing on
acquisition are included in the staging analysis above.
Acquired portfolios within the Mortgage Lending and Idem Capital segments
which were largely non-performing at acquisition, and which were purchased at
a deep discount to face value are shown as POCI assets above. Although no
provision is shown above for such assets, the effect of the discount on
purchase is included in the gross value ensuring that the carrying value is
substantially less than the current balances due from customers and the level
of cover is considerable.
Analysis of Stage 2 loans
The table below analyses the accounts in Stage 2 between those not more than
one month in arrears where an SICR has nonetheless been identified from other
information and accounts more than one month in arrears.
Cases which have been greater than one month in arrears in the last three
months, but which are not at the balance sheet date are shown as 'recent
arrears' in the tables below. These cases have been analysed separately for
the first time in the current year.
Levels of Stage 2 assets increased substantially during the early part of the
Covid outbreak, and has been broadly stable over the course of the year. The
largest part of the Stage 2 balance at 30 September 2021 related to extended
payment holiday accounts transferred from Stage 1 These are shown in the <
1 month arrears column in the table below. As fewer extensions were granted
after 30 September 2020, the rate of increase of such Stage 2 cases has been
much reduced in the period.
While the number of Stage 2 arrears accounts across the portfolios has
increased since September 2020 in the Mortgage Lending segment as payment
reliefs unwind, levels remain far lower than those seen in September 2019 in
more normal payment conditions.
Coverage levels in Stage 2 across the portfolios have reduced since 30
September 2020, with an improved economic outlook and increasing security
values. However, these remain higher than those seen pre-pandemic, due to the
impact of PMAs, particularly on '<1 month arrears' cases. Coverage ratios
of '> 1 < = 3 months arrears' cases have been varied due to the
composition of the relatively small balances, particularly in the Commercial
Lending and Idem Capital divisions.
< 1 month Recent arrears > 1 <= 3 months arrears Total
arrears
£m £m £m £m
30 September 2021
Gross loan book
Mortgage Lending 1,184.8 8.0 13.6 1,206.4
Commercial Lending 61.1 0.2 5.1 66.4
Idem Capital 2.9 0.7 2.7 6.3
Total 1,248.8 8.9 21.4 1,279.1
Impairment provision
Mortgage Lending (9.9) (0.1) (0.2) (10.2)
Commercial Lending (0.9) - (0.1) (1.0)
Idem Capital - - (0.1) (0.1)
Total (10.8) (0.1) (0.4) (11.3)
Net loan book
Mortgage Lending 1,174.9 7.9 13.4 1,196.2
Commercial Lending 60.2 0.2 5.0 65.4
Idem Capital 2.9 0.7 2.6 6.2
Total 1,238.0 8.8 21.0 1,267.8
Coverage ratio
Mortgage Lending 0.84% 1.25% 1.47% 0.85%
Commercial Lending 1.50% - 1.96% 1.51%
Idem Capital - - 3.70% 1.59%
Total 0.86% 1.12% 1.87% 0.88%
< 1 month Recent arrears > 1 <= 3 months arrears Total
arrears
£m £m £m £m
30 September 2020
Gross loan book
Mortgage Lending 879.9 5.9 17.4 903.2
Commercial Lending 113.2 10.5 8.6 132.3
Idem Capital 4.8 1.6 3.5 9.9
Total 997.9 18.0 29.5 1,045.4
Impairment provision
Mortgage Lending (12.0) (0.2) (0.4) (12.6)
Commercial Lending (2.5) (0.1) (0.4) (3.0)
Idem Capital (0.1) - (0.1) (0.2)
Total (14.6) (0.3) (0.9) (15.8)
Net loan book
Mortgage Lending 867.9 5.7 17.0 890.6
Commercial Lending 110.7 10.4 8.2 129.3
Idem Capital 4.7 1.6 3.4 9.7
Total 983.3 17.7 28.6 1,029.6
Coverage ratio
Mortgage Lending 1.36% 3.39% 2.30% 1.40%
Commercial Lending 2.21% 0.95% 4.65% 2.27%
Idem Capital 2.08% - 2.86% 2.02%
Total 1.46% 1.67% 3.05% 1.51%
Analysis of Stage 3 loans
The table below analyses the accounts in Stage 3 between those:
· In the process of sale or other enforcement procedures
('Realisations')
· Where a receiver of rent ('RoR') has been appointed by the Group to
manage the property on the customers' behalf
· Which are being managed on a long-term basis and where full recovery
is possible, but which are considered to meet regulatory default criteria at
the balance sheet date ('>3 month arrears')
· which no longer meet regulatory default criteria but which are being
retained in Stage 3 for a probationary period ('Probation')
Where an account meets two of the criteria, it will be assigned to the
category shown first in the list above.
In these disclosures probation accounts have been analysed separately for the
first time, in order to provide better information for users.
The impact of Covid on the number and value of Stage 3 accounts has been
limited so far. Payment reliefs have prevented arrears being recorded and
other enforcement activities have been limited by government intervention.
This particularly impacts on cases analysed as 'realisations'.
The completion of payment relief periods has led to some increases in > 3
month arrears cases, particularly in the Mortgage Lending business, while
credit reviews have identified at risk cases in other areas. This increase is,
however, is offset by the continuing realisations from the receiver of rent
portfolio as long-term cases are managed out.
Coverage levels have generally reduced a little from 30 September 2020 as a
result of increased security values, while remaining substantially in excess
of pre-Covid levels. The coverage ratio for Commercial Lending is subject to
fluctuations as the number of cases is relatively low and the ratio can be
significantly influenced by individual larger cases.
Probation > 3 month arrears RoR managed Realisations Total
£m £m £m £m £m
30 September 2021
Gross loan book
Mortgage Lending 7.3 20.7 80.9 11.1 120.0
Commercial Lending 0.6 11.4 - 7.0 19.0
Idem Capital 0.7 21.3 - 3.3 25.3
Total 8.6 53.4 80.9 21.4 164.3
Impairment provision
Mortgage Lending (0.3) (0.9) (17.4) (4.3) (22.9)
Commercial Lending (0.1) (10.3) - (3.2) (13.6)
Idem Capital - (1.0) - (1.4) (2.4)
Total (0.4) (12.2) (17.4) (8.9) (38.9)
Net loan book
Mortgage Lending 7.0 19.8 63.5 6.8 97.1
Commercial Lending 0.5 1.1 - 3.8 5.4
Idem Capital 0.7 20.3 - 1.9 22.9
Total 8.2 41.2 63.5 12.5 125.4
Coverage ratio
Mortgage Lending 4.11% 4.35% 21.51% 38.74% 19.08%
Commercial Lending 16.67% 90.35% - 45.71% 71.58%
Idem Capital - 4.69% - 42.42% 9.49%
Total 4.65% 22.85% 21.51% 41.59% 23.68%
Probation > 3 month arrears RoR managed Realisations Total
£m £m £m £m £m
30 September 2020
Gross loan book
Mortgage Lending 6.5 12.9 86.7 20.9 127.0
Commercial Lending 3.2 11.2 - 5.8 20.2
Idem Capital 1.0 24.3 - 3.6 28.9
Total 10.7 48.4 86.7 30.3 176.1
Impairment provision
Mortgage Lending (0.3) (1.5) (20.8) (8.1) (30.7)
Commercial Lending (0.9) (4.1) - (3.2) (8.2)
Idem Capital - (2.8) - (1.7) (4.5)
Total (1.2) (8.4) (20.8) (13.0) (43.4)
Net loan book
Mortgage Lending 6.2 11.4 65.9 12.8 96.3
Commercial Lending 2.3 7.1 - 2.6 12.0
Idem Capital 1.0 21.5 - 1.9 24.4
Total 9.5 40.0 65.9 17.3 132.7
Coverage ratio
Mortgage Lending 4.62% 11.63% 23.99% 38.76% 24.17%
Commercial Lending 28.12% 36.61% - 55.17% 40.59%
Idem Capital - 11.52% - 47.22% 15.57%
Total 11.21% 17.36% 23.99% 42.90% 24.65%
The security values available to reduce exposure at default in the calculation
shown above for Stage 3 accounts are set out below. The estimated value of the
security represents, for each account, the lesser of the valuation estimate
and the exposure at default in the central scenario. Security values are based
on the most recent valuation of the relevant asset held by the Group, indexed
or depreciated as appropriate.
2021 2020
£m £m
First mortgages 74.7 71.9
Second mortgages 15.4 17.3
Asset finance 4.7 6.7
Motor finance 2.0 1.5
96.8 97.4
The RoR managed accounts are being managed to ensure the optimal resolution
for landlords, tenants and lenders and this long-term, stable situation
underpinned their treatment as not impaired under IAS 39, but the existence of
the RoR arrangement causes the accounts to be treated as defaulted for
regulatory purposes. The Group's RoR arrangements are described in more detail
below.
Idem Capital balances with over three months arrears comprise principally
second charge mortgage accounts originated over ten years ago which have been
over three months in arrears for some time. These accounts are generally
making regular payments and have significant levels of equity in the
underlying property which reduces the required provision to the value shown
above. It is expected that a high proportion of these accounts will eventually
redeem naturally, either on the sale of the property or by the satisfaction of
the amount due through instalment payments.
Buy-to-let receiver of rent cases (Stage 3)
The following table analyses the number and gross carrying value of RoR
managed accounts shown above by the date of the receivers' appointment,
illustrating this position.
30 September 30 September 2020
2021
No. £m No. £m
Managed accounts
Appointment date
2010 and earlier 333 56.3 369 62.4
2011 to 2013 56 9.1 72 12.4
2014 to 2016 24 3.3 29 4.2
2016 and later 86 12.2 46 7.7
Total managed accounts 499 80.9 516 86.7
Accounts in the process of realisation 54 10.2 104 19.7
553 91.1 620 106.4
Receiver of rent accounts in the process of realisation at the period end are
included under that heading in the Stage 3 tables above.
In addition to the cases analysed above, no POCI mortgage accounts also had a
receiver of rent appointed (2020: 3), making a total of 553 (2020: 623).
(c) Movements in impairment provision in the year
The movements in the impairment provision calculated under IFRS 9, analysed by
business segments, are set out below.
Mortgage Lending Commercial Idem Total
Lending
Capital
£m £m £m £m
At 30 September 2020 48.3 28.6 4.9 81.8
(Released) / Provided in period (5.9) 4.0 (1.2) (3.1)
Amounts written off (7.6) (4.9) (0.8) (13.3)
At 30 September 2021 34.8 27.7 2.9 65.4
At 30 September 2019 26.8 10.7 4.4 41.9
Provided in period 25.8 22.7 1.3 49.8
Amounts written off (4.3) (4.8) (0.8) (9.9)
At 30 September 2020 48.3 28.6 4.9 81.8
Accounts are considered to be written off for accounting purposes if a balance
remains once standard enforcement processes have been completed, subject to
any amount retained in respect of expected salvage receipts. This has no
effect on the net carrying value, only on the amounts reported as gross loan
balances and accumulated impairment provisions.
The difference between the amount shown above and the profit and loss account
charge for the period is amounts recovered on previously written off accounts
of £1.6m (2020: £1.5m).
A more detailed analysis of these movements by IFRS 9 stage on a consolidated
basis for the year ended 30 September 2021 and 30 September 2020 is set out
below.
Stage 1 Stage 2 Stage 3 POCI Total
£m £m £m £m £m
Loss allowance at 30 September 2020 22.2 15.8 43.4 0.4 81.8
New assets originated or purchased 8.1 - - - 8.1
Changes in loss allowance
Transfer to Stage 1 4.7 (2.6) (2.1) - -
Transfer to Stage 2 (1.4) 2.1 (0.7) - -
Transfer to Stage 3 (0.2) (0.7) 0.9 - -
Changes on stage transfer (3.8) 1.8 3.1 - 1.1
Changes due to credit risk (14.6) (5.1) 7.6 (0.2) (12.3)
Write offs - - (13.3) - (13.3)
Loss allowance at 15.0 11.3 38.9 0.2 65.4
30 September 2021
Loss allowance at 30 September 2019 6.0 3.7 32.2 - 41.9
New assets originated or purchased
10.2 - - - 10.2
Changes in loss allowance
Transfer to Stage 1 0.9 (0.7) (0.2) - -
Transfer to Stage 2 (1.2) 1.3 (0.1) - -
Transfer to Stage 3 (0.5) (0.4) 0.9 - -
Changes on stage transfer (0.5) 7.5 6.2 - 13.2
Changes due to credit risk 7.3 4.4 14.3 0.4 26.4
Write offs - - (9.9) - (9.9)
Loss allowance at 22.2 15.8 43.4 0.4 81.8
30 September 2020
The principal movements in the impairment provision in the year were
downwards, with a more benign economic outlook reducing both the estimated
likelihood of losses and the expected loss on defaulted cases as security
values improved. However coverage levels still remain in excess of those
pre-Covid, with PMAs in place to compensate for the potential impact of credit
issues not apparent in the data.
While less accounts have been granted payment holiday extensions in the year
than in the year ended 30 September 2020, this has driven further transfers
from Stage 1 to Stage 2. Transfers to Stage 3 reflect principally a small
number of realisation cases and other cases identified through credit review.
Write offs largely relate to the realisation of already provided losses on
cases being worked out on a long-term basis.
In the year ended 30 September 2020 the principal factor generating the
increase in the loss allowance in the period was the impact of the Covid
crisis, which has led to increased loss expectations across all of the Group's
portfolios, primarily as a result of the forecast deterioration in key
economic variables and their impact on the Group's customers. The broad
availability of payment holidays was also reflected, with extended payment
holiday accounts transferred to Stage 2 and PMAs made to allow for the
potential delay in the recognition of credit issues due to reliefs.
The movements in the Loans to Customers balances in respect of which these
loss allowances have been made are set out below.
Stage 1 Stage 2 Stage 3 POCI Total
£m £m £m £m £m
Balance at 30 September 2020 11,329.7 1,045.4 176.1 162.0 12,713.2
New assets originated or purchased 2,419.4 - - - 2,419.4
Changes in staging
Transfer to Stage 1 158.5 (149.5) (9.0) - -
Transfer to Stage 2 (514.2) 519.6 (5.4) - -
Transfer to Stage 3 (23.7) (21.6) 45.3 - -
Redemptions and repayments (1,884.9) (158.6) (35.7) (53.1) (2,132.3)
Write offs - - (13.3) - (13.3)
Other changes 415.6 43.8 6.3 15.4 481.1
Balance at 30 September 2021 11,900.4 1,279.1 164.3 124.3 13,468.1
Loss allowance (15.0) (11.3) (38.9) (0.2) (65.4)
Carrying value 11,885.4 1,267.8 125.4 124.1 13,402.7
Balance at 30 September 2019 11,382.6 458.5 167.9 219.0 12,228.0
New assets originated or purchased 2,071.4 - - - 2,071.4
Changes in staging
Transfer to Stage 1 202.3 (200.1) (2.2) - -
Transfer to Stage 2 (846.2) 849.2 (3.0) - -
Transfer to Stage 3 (42.6) (20.5) 63.1 - -
Redemptions and repayments (1,488.3) (54.1) (42.0) (78.1) (1,662.5)
Write offs - - (9.9) - (9.9)
Other changes 50.5 12.4 2.2 21.1 86.2
Balance at 30 September 2020 11,329.7 1,045.4 176.1 162.0 12,713.2
Loss allowance (22.2) (15.8) (43.4) (0.4) (81.8)
Carrying value 11,307.5 1,029.6 132.7 161.6 12,631.4
Other changes includes interest and similar charges
(d) Economic inputs to provision calculations
Impairment provision under IFRS 9 is calculated on a forward-looking ECL
basis, based on expected economic conditions in multiple internally coherent
scenarios. While the provision calculation is intended to address all possible
future economic outcomes, the Group, in common with most other lenders, uses a
small number of differing scenarios as representatives of this universe of
potential outturns.
The Group uses four distinct economic scenarios chosen to represent the range
of possible outcomes and allow for the impact of economic asymmetry in the
calculations. Each scenario comprises a number of economic parameters and
while models for different portfolios may not use all of the variables, the
set, as a whole, is defined for the Group and must be consistent.
As the Group does not have an internal economics function, in developing its
economic scenarios it considers analysis from reputable external sources to
form a general market consensus which informs its central scenario. These
sources include data and forecasts produced by the Office of Budget
Responsibility ('OBR') and the PRA as well as private sector economic research
bodies. The Group also takes account of public statements from bodies such as
the Bank of England and the UK Government to inform its final position.
The central scenario used for IFRS 9 impairment purposes is the same scenario
which forms the basis of the Group's business planning and forecasting and
will therefore generally carry the highest probability weighting. In its
September 2021 forecasting cycle (the 'October reforecast') the Group has
adopted a central economic scenario derived using a broadly equivalent
approach to that used in September 2020, with the starting point of the
scenario updated to reflect the actual movements of economic variables in the
year. The general trend of the Group's central forecast is consistent with the
monetary forecast published by the Bank of England in August 2021.
Compared to the central scenario adopted at 30 September 2020, the new central
forecast is broadly similar across the five year period, but more optimistic
as to short term prospects. This 2021/2022 upgrade is a result of the opening
position being better than implied in the 2020 central scenario, progress made
to date in combatting the pandemic in the UK, including the success of the
vaccination programme, and a more positive outlook from economists generally.
The upside and downside scenarios continue to be derived from the central
scenario, as they have been in previous periods. However, these scenarios are
not as markedly different in shape as those used at September 2020 nor as
widely divergent from the central position, with a greater level of consensus
as to the shape and timing of the post-Covid trajectory of the UK economy
emerging amongst analysts and commentors. It should be noted that the 2020
scenarios converged towards the later part of the five-year period, as Covid
impacts receded. Therefore, a less divergent starting point for the 2021
scenarios is in line with this expectation.
The severe scenario has been derived from the stress testing scenarios
published by the Bank of England, as in previous periods. The stress testing
scenario published in January 2021 was used in this iteration of the Group's
forecasts. This is a more severe scenario than that published for 2020. The
Bank of England scenario includes a house price projection based on a sharp
decline and a rapid bounce back, which would have a limited impact on expected
losses. As house prices have a significant impact on the Group's modelling of
losses, it was determined that the impact of a more protracted slump, would
better represent a severe downturn and the Bank of England scenario was
adjusted accordingly.
Following a review of the weightings of the different scenarios, set against
the overall potential for variability in the future economic outlook, the
Group decided to maintain the scenario weightings used at 30 September 2020.
The weightings attached to each scenario are set out below
2021 2020
Central scenario 40% 40%
Upside scenario 10% 10%
Downside scenario 35% 35%
Severe scenario 15% 15%
100% 100%
The Group's economic scenarios comprise six variables based on standard
publicly available metrics for the UK. These variables are
· Year-on-year change in Gross Domestic Product ('GDP') as measured by
the Office of National Statistics ('ONS')
· Year-on-year change in the House Price Index ('HPI') as measured by
the Nationwide Building Society
· Bank Base Rate ('BBR'), as set by the Bank of England
· Consumer Price Inflation ('CPI') rate, as measured by the ONS
· Unemployment rate, as measured by the ONS
· Annual change in secured lending, as measured by the Bank of England
'mortgage advances' data series
· Annual change in consumer credit, as measured by the Bank of England
'unsecured advances' data series
The projected average annual values of each of these variables in each of the
first five financial years of the forecast period are set out below.
30 September 2021
Gross Domestic Product ('GDP') (year-on-year change)
2022 2023 2024 2025 2026
Central scenario 7.2% 2.0% 1.3% 1.6% 1.9%
Upside scenario 8.6% 2.5% 2.1% 1.8% 1.9%
Downside scenario 3.9% 3.4% 2.1% 1.9% 1.9%
Severe scenario (3.7)% 8.9% 4.9% 2.6% 2.0%
House Price Index ('HPI') (year-on-year change)
2022 2023 2024 2025 2026
Central scenario (0.7)% 2.1% 2.7% 3.2% 3.0%
Upside scenario 4.0% 3.9% 4.5% 4.7% 2.6%
Downside scenario (4.9)% (5.9)% - 2.1% 2.1%
Severe scenario (10.9)% (11.6)% (7.9)% (1.8)% 0.7%
Bank Base Rate ('BBR') (rate)
2022 2023 2024 2025 2026
Central scenario 0.1% 0.1% 0.4% 0.7% 0.8%
Upside scenario 0.1% 0.5% 0.9% 1.0% 1.0%
Downside scenario 0.1% 0.1% 0.2% 0.3% 0.5%
Severe scenario - (0.1)% - - 0.1%
Consumer Price Inflation ('CPI') (rate)
2022 2023 2024 2025 2026
Central scenario 3.8% 2.3% 1.9% 2.0% 2.0%
Upside scenario 3.0% 2.1% 2.0% 2.0% 2.0%
Downside scenario 4.2% 3.0% 2.1% 2.0% 2.0%
Severe scenario 0.9% 0.4% 0.9% 1.5% 1.9%
Unemployment (rate)
2022 2023 2024 2025 2026
Central scenario 5.4% 5.1% 4.7% 4.3% 4.2%
Upside scenario 4.6% 4.3% 4.3% 4.0% 3.8%
Downside scenario 5.8% 5.5% 5.1% 4.7% 4.6%
Severe scenario 9.4% 11.5% 8.7% 5.8% 4.9%
Secured lending (annual change)
2022 2023 2024 2025 2026
Central scenario 4.4% 3.6% 3.1% 3.2% 3.3%
Upside scenario 5.3% 4.8% 4.3% 3.8% 3.8%
Downside scenario 3.3% 2.8% 2.9% 3.6% 3.9%
Severe scenario 1.5% (2.4)% (1.0)% 1.3% 2.5%
Consumer credit (annual change)
2022 2023 2024 2025 2026
Central scenario 2.6% 4.4% 5.5% 6.1% 6.2%
Upside scenario 4.3% 6.5% 7.3% 8.0% 8.3%
Downside scenario 2.3% 2.0% 2.0% 2.0% 2.3%
Severe scenario 0.6% 5.1% 1.2% 1.7% 4.0%
30 September 2020
Gross Domestic Product ('GDP') (year-on-year change)
2021 2022 2023 2024 2025
Central scenario 4.9% 5.7% 2.2% 1.5% 1.4%
Upside scenario 6.0% 5.4% 2.4% 1.5% 1.5%
Downside scenario 2.1% 9.3% 2.9% 1.3% 1.5%
Severe scenario 0.2% 9.5% 2.2% 1.4% 1.3%
House Price Index ('HPI') (year-on-year change)
2021 2022 2023 2024 2025
Central scenario (0.8)% 0.3% 4.0% 4.0% 3.8%
Upside scenario 1.3% 1.3% 3.0% 3.3% 3.8%
Downside scenario (3.5)% (7.0)% (0.1)% 3.8% 3.8%
Severe scenario (11.8)% (13.8)% (5.3)% 1.5% 3.8%
Bank Base Rate ('BBR') (rate)
2021 2022 2023 2024 2025
Central scenario 0.1% 0.1% 0.4% 0.8% 0.8%
Upside scenario 0.1% 0.4% 0.7% 0.9% 1.0%
Downside scenario 0.1% 0.1% 0.1% 0.3% 0.8%
Severe scenario 0.0% (0.2)% 0.1% 0.2% 0.6%
Consumer Price Inflation ('CPI') (rate)
2021 2022 2023 2024 2025
Central scenario 0.9% 1.7% 2.2% 2.1% 2.1%
Upside scenario 1.2% 2.1% 2.1% 2.2% 2.1%
Downside scenario 0.7% 1.3% 1.8% 2.1% 2.0%
Severe scenario (0.1)% 0.7% 1.5% 2.0% 2.0%
Unemployment (rate)
2021 2022 2023 2024 2025
Central scenario 7.1% 5.3% 5.0% 5.0% 4.4%
Upside scenario 6.3% 4.8% 4.6% 4.5% 4.1%
Downside scenario 8.2% 6.5% 5.7% 5.0% 4.8%
Severe scenario 8.5% 7.8% 7.0% 6.3% 5.5%
Secured lending (annual change)
2021 2022 2023 2024 2025
Central scenario 3.6% 3.7% 3.8% 3.9% 3.9%
Upside scenario 4.7% 4.5% 4.2% 4.1% 4.0%
Downside scenario 1.8% 2.3% 3.2% 3.7% 3.8%
Severe scenario (0.9)% 0.2% 2.3% 3.4% 3.7%
Consumer credit (annual change)
2021 2022 2023 2024 2025
Central scenario 6.0% 6.1% 6.1% 6.3% 6.3%
Upside scenario 8.7% 8.2% 7.3% 6.9% 6.7%
Downside scenario 1.8% 2.8% 4.3% 5.4% 5.7%
Severe scenario (4.6)% (2.3)% 1.6% 4.0% 4.8%
After the end of the initial five year period, the final rate or rate of
change (as appropriate) is assumed to continue into the future in each
scenario.
To illustrate the levels of non-linearity in the various scenarios, the
maximum and minimum quarterly levels for each variable over the five year
period commencing on the balance sheet date are set out below.
30 September 2021
Central Upside Downside scenario Severe scenario
scenario
scenario
Max Min Max Min Max Min Max Min
%
%
%
%
%
%
%
%
Economic driver
GDP 11.5 1.1 13.3 1.6 7.3 0.9 14.3 (5.9)
HPI 6.1 (4.0) 7.7 0.6 2.9 (9.8) 2.4 (16.9)
BBR 0.8 0.1 1.0 0.1 0.5 0.1 0.2 (0.1)
CPI 4.0 1.8 3.8 1.8 4.5 1.8 2.0 0.2
Unemployment 5.5 4.1 4.7 3.8 5.9 4.5 11.9 4.8
Secured lending 4.8 3.0 5.5 3.5 4.0 2.5 3.1 (2.5)
Consumer credit 6.4 0.4 8.5 1.9 4.6 (0.1) 9.2 (8.9)
30 September 2020
Central Upside Downside scenario Severe scenario
scenario
scenario
Max Min Max Min Max Min Max Min
%
%
%
%
%
%
%
%
Economic driver
GDP 18.0 (7.6) 18.8 (5.9) 17.8 (15.1) 20.5 (17.9)
HPI 5.0 (4.0) 4.0 0.0 4.0 (10.0) 4.0 (20.0)
BBR 0.8 0.1 1.0 0.1 1.0 0.1 0.8 (0.4)
CPI 2.4 0.6 2.3 0.7 2.3 0.2 2.3 (0.3)
Unemployment 7.6 4.0 7.0 4.0 9.0 4.5 9.0 5.3
Secured lending 3.9 3.5 4.8 4.0 3.8 1.7 3.7 (1.2)
Consumer credit 6.3 6.0 8.8 6.7 5.7 1.5 4.8 (5.2)
The asymmetry in the models is demonstrated by comparing the calculated
impairment provision with that which would have been produced using the
Central scenario alone, 100% weighted.
2021 2020
£m £m
Calculated provision 65.4 81.8
100% weighted central scenario 52.7 67.4
Effect of multiple economic scenarios 12.7 14.4
Economic conditions
To illustrate the potential impact of differing future economic scenarios on
the total impairment, the provision which would be calculated if each of the
economic scenarios were 100% weighted are shown below:
Scenario 2021 2020
Provision Difference Provision £m Difference £m
£m £m
Central 52.7 (12.7) 67.4 (14.4)
Upside 47.1 (18.3) 58.0 (23.8)
Downside 68.1 2.7 82.4 0.6
Severe Downside 106.1 40.7 134.3 52.5
The weighted average of these 100% weighted provisions need not equal the
weighted average ECL due to the impact of the differing PDs on staging.
However due to the impact of post-model stage adjustments at 30 September
2020, the effect on the PD SICR test of 100% weighting has not been taken into
account in the calculations at that date.
12. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING
The analysis below splits derivatives between those accounted for within
portfolio fair value hedges, or as cash flow hedges and those which, despite
representing an economic hedge, are not accounted for as hedges. There were no
individual interest rate risk hedging arrangements in place either in the year
ended 30 September 2021 or the preceding year.
2021 2021 2020 2020
Assets Liabilities Assets Liabilities
£m £m £m £m
Derivatives in hedge accounting relationships
Fair value hedges
Interest rate swaps
Fixed to floating 35.9 (35.8) - (130.0)
Floating to fixed 2.8 (5.9) 14.4 -
38.7 (41.7) 14.4 (130.0)
Cash flow hedges
Cross-currency basis swaps
Dollar-sterling - - 213.2 -
Euro-sterling - - 232.1 -
- - 445.3 -
Total derivatives in hedge accounting relationships 38.7 (41.7) 459.7 (130.0)
Other derivatives
Interest rate swaps 5.5 (2.0) 3.4 (2.4)
Currency futures - (0.2) 0.2 -
Total recognised derivative assets / (liabilities) 44.2 (43.9) 463.3 (132.4)
All hedging relationships and strategies at 30 September 2020 described in the
2020 Group Accounts have continued in the period. All remaining borrowings and
their related swaps were paid down in the year.
The Group's securitisation borrowings are denominated in sterling, euros and
US dollars. All currency borrowings are swapped at inception so that they have
the effect of sterling borrowings. These swaps provide an effective hedge
against exchange rate movements, but the requirement to carry them at fair
value leads, when exchange rates have moved significantly since the issue of
the notes, to large balances for the swaps being carried in the balance sheet.
This is currently the case with both euro and US dollar swaps, although the
debit balance is compensated for by retranslating the borrowings at the
current exchange rate.
These compensating differences gave rise to the exchange differences shown in
note 22.
13. INTANGIBLE ASSETS
Intangible assets at net book value comprise:
2021 2020 2019
£m £m £m
Goodwill 164.4 164.4 164.4
Computer software 3.4 2.2 2.4
Other intangibles 2.7 3.5 4.3
Total assets 170.5 170.1 171.1
The balance for goodwill at 30 September 2021 shown above includes £113.0m in
respect of the Small and Medium sized enterprises lending Cash Generating Unit
('CGU') and £49.8m in respect of the Development Finance CGU.
(a) SME lending
The goodwill carried in the accounts relating to the SME lending CGU was
recognised on acquisitions in the years ended 30 September 2016 and
30 September 2018.
An impairment review undertaken at 30 September 2021 indicated that no write
down was required.
The recoverable amount of the SME lending CGU used in this impairment testing
is determined on a value in use basis using pre-tax cash flow projections
based on financial budgets approved by the Board in November 2021 covering a
five-year period. These forecasts reflect the projected trajectory of the
business recovery from the Covid pandemic with the five year average growth
rate beginning to normalise following the initial bounce back phase in 2021,
as well as the Group's current strategy for the business.
The key assumptions underlying the value in use calculation for the SME
lending CGU are:
· Level of business activity, based on management expectations. The
forecast assumes a compound annual growth rate ('CAGR') for new business over
the five-year period of 13.9%, compared with 19.7% used in the calculation at
30 September 2020. Cash flows beyond the five-year budget are extrapolated
using a constant growth rate of 1.6% (2020: 1.5%) which does not exceed the
long term average growth rates for the markets in which the business is active
Management have concluded that the levels of activity assumed for the purpose
of this forecast are reasonable, based on past experience and the current
economic environment
· Discount rate, which is based on third party estimates of the implied
industry cost of capital. The pre-tax discount rate applied to the cash flow
projection is 13.4% (2020: 15.0%)
As an illustration of the sensitivity of this impairment test to movements in
the key assumptions, the Group has calculated that a 0% growth rate combined
with a 15.0% reduction in profit levels and a 159 basis point increase in the
pre-tax discount rate would eliminate the headroom in the projection. A 0%
growth rate combined with a 20.7% reduction in profit levels and a 125 basis
point increase in the pre-tax discount rate would generate a write down of
£10.0m.
In the testing carried out at 30 September 2020, a 10.0% reduction in profit
levels coupled with a 100 basis point increase in the pre-tax discount rate
would eliminate the headroom.
(b) Development finance
The goodwill carried in the accounts relating to the development finance CGU
was first recognised on a business acquisition in the year ended 30 September
2018.
An impairment review undertaken at 30 September 2021 indicated that no write
down was required.
The recoverable amount of the development finance CGU used in this impairment
testing is determined on a value in use basis using pre-tax cash flow
projections based on financial budgets approved by the Board in November 2021
covering a five-year period. These forecasts show growth slower than that
originally forecast for 2021 which was inflated by the impact of the initial
post Covid bounce back.
The key assumptions underlying the value in use calculation for the
development finance cash generating unit are:
· Level of business activity, based on management expectations. The
forecast assumes a CAGR for drawdowns over the five-year period of 13.2%,
compared with 16.9% used in the calculation at 30 September 2020. Cash flows
beyond the five-year budget are extrapolated using a constant growth rate of
1.6% (2020: 1.5%) which does not exceed the long-term average growth rate for
the UK economy
Management have concluded that the levels of activity assumed for the purpose
of this forecast are reasonable, based on past experience and the current
economic environment
· Discount rate, which is based on third party estimates of the implied
industry cost of capital. The pre-tax discount rate applied to the cash flow
projection is 13.2% (2020: 14.2%)
Management believes any reasonably possible change in the key assumptions
above would not cause the recoverable amount of the development finance CGU to
fall below the balance sheet carrying value. This was also the case in the
testing carried out at 30 September 2020.
14. RETAIL DEPOSITS
The Group's retail deposits, held by Paragon Bank PLC, were received from
customers in the UK and are denominated in sterling. The deposits comprise
principally term deposits, and notice and easy access accounts. The method of
interest calculation on these deposits is analysed as follows:
2021 2020 2019
£m £m £m
Fixed rate 5,466.0 4,975.9 4,154.4
Variable rates 3,834.4 2,880.7 2,237.5
9,300.4 7,856.6 6,391.9
The weighted average interest rate on retail deposits at 30 September 2021,
analysed by charging method, was:
2021 2020 2019
% % %
Fixed rate 1.25 1.69 2.02
Variable rates 0.42 0.72 1.43
All deposits 0.91 1.34 1.81
The contractual maturity of these deposits is analysed below.
2021 2020 2019
£m £m £m
Amounts repayable
In less than three months 789.0 565.0 466.6
In more than three months, but not more than one year 2,088.4
3,105.4 2,725.6
In more than one year, but not more than two years 1,158.0
1,580.1 1,541.6
In more than two years, but not more than five years 900.9
507.4 664.8
Total term deposits 5,981.9 5,497.0 4,613.9
Repayable on demand 3,318.5 2,359.6 1,778.0
9,300.4 7,856.6 6,391.9
Fair value adjustments for portfolio hedging 3.9
(3.0) 10.4
9,297.4 7,867.0 6,395.8
15. BORROWINGS
On 12 March 2021, Fitch Ratings confirmed the Group's Long-Term Issuer Default
Rating at BBB. The outlook was upgraded from negative to stable. It affirmed
its senior unsecured debt rating at BBB- and the rating of the 2016 £150.0m
Tier-2 Bond at BB+.
All borrowings described in the Group Accounts for the year ended 30 September
2020 remained in place throughout the period, except as noted below.
Since 30 September 2020 the Group has made further drawings under the Bank of
England Term Funding Scheme for SMEs ('TFSME'), increasing its borrowings
under the scheme to £2,750.0m. Borrowings of £875.0m under the original Bank
of England Term Funding Scheme ('TFS') which were due for settlement in the
current financial year were repaid.
During the period the Group also continued to have access to the Indexed
Long-Term Repo ('ILTR') scheme provided by the Bank of England, but did not
make any drawings.
On 25 March 2021 the Company issued £150.0m of Fixed Rate Callable
Subordinated Tier-2 Notes due 2031 at par. These Notes bear interest at a rate
of 4.375% per annum until 25 September 2026 after which interest will be
payable at a rate which is 3.956% over that payable on UK Government bonds of
similar duration at that time. These Notes are callable at the option of the
Company between 25 June 2026 and 25 September 2026 and may be called at any
time in the event of certain tax or regulatory changes. The Notes are
unsecured and subordinated to all creditors of the Company other than the
Tier-2 Notes issued in 2016, with which they rank equally. The Notes are rated
BB+ by Fitch. The proceeds of the Notes will be utilised in accordance with
the Group's Green Bond Framework, which is available on its investor website.
At the same time as this issuance the Group purchased £130.9m of nominal
value of its 2016 Tier‑2 Notes by market tender for a total consideration of
£134.6m. These Notes were derecognised and the premium paid taken to profit
and loss as interest payable and similar charges. The remaining Notes were
redeemed at their call date in September 2021.
In March 2021 the Group's warehouse loan facility, held by Paragon Seventh
Funding Limited was renegotiated and the margin payable on drawings reduced to
0.60% above LIBOR from 1.05% above LIBOR. On 8 November 2021, after the year
end, revisions to the facility were agreed extending the commitment period for
an initial 13-month period with the ability to extend monthly until a
potential final maturity date of 24 November 2024. The maximum drawing was
increased to £450.0m and the interest rate payable was transitioned to 0.5%
above SONIA.
On 25 August 2021 an agreement was reached with the senior noteholders of
Paragon Mortgages (No. 25) PLC to transition to a SONIA-linked basis for
interest charging, effective from the interest payment date on 15 February
2022. From that date the notes will bear interest calculated with reference to
SONIA rather than LIBOR and the note margins will be increased by 0.12% in
line with the ISDA fallback adjustment rate. Other terms of the notes remain
unchanged. The agreement also provided for the transition of hedging
arrangements in the securitisation to a SONIA basis.
The Group's £60.0m retail bond was repaid in full at its due date of 5
December 2020.
On 11 November 2020 a Group company, Paragon Mortgages (No. 28) PLC, issued
£703.1m of rated sterling mortgage backed floating rate notes, analysed
below, at par.
Class Fitch Moody's Interest margin above compounded SONIA Principal value
rating rating £m
A AAA Aaa 0.95% 623.8
B AA Aa1 1.35% 39.7
C A Aa3 1.65% 21.6
D BBB- Baa1 1.95% 18.0
703.1
All of the above notes were retained by the Group. This gives the Group access
to additional liquidity, as described in note 57 to the 2020 Group Accounts.
Of the Group's borrowings at 30 September 2020, the following mortgages backed
floating notes were repaid
· Paragon Mortgages (No. 11) PLC in October 2020
· Paragon Mortgages (No. 15) PLC in December 2020
· Paragon Mortgages (No. 13) PLC in April 2021
· Paragon Mortgages (No. 14) PLC in June 2021.
Repayments made in respect of the Group's borrowings are shown in note 24.
During the period agreement was reached with the holders of the debt of
Paragon Second Funding Limited to convert the reference rate from LIBOR to
SONIA on broadly similar economic terms. This was not accounted for as a
modification, as permitted by IFRS 9.
16. SUNDRY LIABILTIES
Sundry liabilities include £22.1m of amounts falling due after more than one
year (2020: £30.7m).
Total sundry liabilities include £7.5m in respect of deferred consideration,
of which £2.9m falls due after more than one year (2020: £13.5m), and £9.5m
in respect of lease liabilities (2020: £5.6m), of which £8.0m falls due
after more than one year (2020: £4.1m).
17. Retirement benefit obligations
The defined benefit obligation at 30 September 2021 has been calculated on a
year-to-date basis. Since the last IAS 19 actuarial valuation at 30 September
2020, there have been movements in financial conditions, requiring an
adjustment to the actuarial assumptions underlying the calculation of the
defined benefit obligation at 30 September 2021. In particular, over the
period since the 30 September 2020 actuarial valuation, the discount rate has
increased by 25 basis points per annum, whereas expectations of long-term
inflation have increased by around 45 basis points, while the performance of
the Plan assets exceeded expectations.
The movements in the deficit on the defined benefit plan during the year ended
30 September 2021 are summarised below.
2021 2020
£m £m
Opening pension deficit 20.4 34.5
Employer contributions (4.8) (24.5)
Amounts posted to profit and loss
Service cost 1.8 2.0
Past service cost - -
Net funding cost (note 4) 0.3 0.4
Administrative expenses 0.8 0.6
Amounts posted to other comprehensive income
Return on plan assets not included in interest (11.0) 1.8
Experience (gain) on liabilities - (1.6)
Actuarial loss from changes in financial assumptions 1.7 6.0
Actuarial loss from changes in demographic assumptions 1.1 1.2
Closing pension deficit 10.3 20.4
Pursuant to the recovery plan agreed with the Trustee of the pension plan, the
Group has effectively granted a first charge over its freehold head office
building as security for its agreed contributions. No account of this charge
is taken in the calculation of the above deficit.
18. Called-up share capital
The share capital of the Company consists of a single class of £1 ordinary
shares.
Movements in the issued share capital in the year were:
2021 2020
Number Number
Ordinary shares
At 1 October 2020 261,777,972 261,573,351
Shares issued 717,213 204,621
Shares cancelled - -
At 30 September 2021 262,495,185 261,777,972
During the year, the Company issued 717,213 shares (2020: 204,621) to satisfy
options granted under Sharesave schemes for a consideration of £2,196,934
(2020: £585,315).
On 24 November 2021, after the year end 12,100,834 shares, held in treasury at
30 September 2021 were cancelled.
19. RESERVES
2021 2020 2019
£m £m £m
Share premium account 70.1 68.7 68.3
Capital redemption reserve 50.3 50.3 50.3
Merger reserve (70.2) (70.2) (70.2)
Cash flow hedging reserve - 2.5 3.0
Profit and loss account 1,005.9 880.7 835.9
1,056.1 932.0 887.3
The merger reserve arose, due to the provisions of UK company law at the time,
on a group restructuring on 12 May 1989 when the Company became the parent
entity of the Group.
20. own shares
2021 2020
£m £m
Treasury shares
At 1 October 2020 23.0 23.0
Shares purchased 37.7 -
Shares cancelled - -
At 30 September 2021 60.7 23.0
ESOP shares
At 1 October 2020 14.8 17.5
Shares purchased 4.5 5.2
Options exercised (3.3) (7.9)
At 30 September 2021 16.0 14.8
Balance at 30 September 2021 76.7 37.8
Balance at 1 October 2020 37.8 40.5
At 30 September 2021 the number of the Company's own shares held in treasury
was 12,100,834 (2020: 5,218,702). These shares had a nominal value of
£12,100,834 (2020: £5,218,702). These shares do not qualify for dividends.
All these shares were cancelled on 24 November 2021, after the year end.
The ESOP shares are held in trust for the benefit of employees exercising
their options under the Company's share option schemes and awards under the
Paragon PSP and Deferred Share Bonus Plan. The trustees' costs are included in
the operating expenses of the Group.
At 30 September 2021, the trust held 3,732,324 ordinary shares (2020:
3,636,218) with a nominal value of £3,732,324 (2020: £3,636,218) and a
market value of £20,359,827 (2020: £12,108,606). Options, or other
share-based awards, were outstanding against all of these shares at
30 September 2021 (2020: all). The dividends on all these shares have been
waived (2020: all).
21. equity Dividend
Amounts recognised as distributions to equity shareholders in the Group in the
period:
2021 2020 2021 2020
Per share Per share £m £m
Equity dividends on ordinary shares
Final dividend for the previous year 14.4p 14.2p 36.5 35.9
Interim dividend for the current year 7.2p - 18.1 -
21.6p 14.2p 54.6 35.9
Amounts paid and proposed in respect of the year:
2021 2020 2021 2020
Per share Per share £m £m
Interim dividend for the current year 7.2p - 18.1 -
Proposed final dividend for the current year 18.9p 14.4p 46.6 36.4
26.1p 14.4p 64.7 36.4
The proposed final dividend for the year ended 30 September 2021 will be paid
on 4 March 2022, subject to approval at the AGM, with a record date of
28 January 2022. The dividend will be recognised in the accounts when it is
paid.
22. net cash flow from operating activities
2021 2020
£m £m
Profit before tax 213.7 118.4
Non-cash items included in profit and other adjustments:
Depreciation of operating property, plant and equipment 4.3 3.5
Profit on disposal of operating property, plant and equipment 0.1 -
Amortisation of intangible assets 2.0 2.0
Movements related to asset backed loan notes denominated in currency
(442.3) (136.8)
Other non-cash movements on borrowings 2.5 1.5
Impairment losses on loans to customers (4.7) 48.3
Charge for share based remuneration 8.9 2.7
Net (increase) / decrease in operating assets:
Assets held for leasing 0.2 (3.2)
Loans to customers (766.6) (493.6)
Derivative financial instruments 419.1 129.1
Fair value of portfolio hedges 104.2 (45.5)
Other receivables 58.8 (35.6)
Net increase / (decrease) in operating liabilities:
Retail deposits 1,443.8 1,464.7
Derivative financial instruments (88.5) 51.9
Fair value of portfolio hedges (13.4) 6.5
Other liabilities (15.7) (39.1)
Cash generated by operations 926.4 1,074.8
Income taxes (paid) (48.3) (46.1)
878.1 1,028.7
Cash flows relating to plant and equipment held for leasing under operating
leases are classified as operating cash flows.
23. net cash flow from investing activities
2021 2020
£m £m
Proceeds from sales of operating property, plant and equipment
- 0.1
Purchases of operating property, plant and equipment (1.9) (1.9)
Purchases of intangible assets (2.4) (1.0)
Net cash (utilised) by investing activities (4.3) (2.8)
24. net cash flow from financing activities
2021 2020
£m £m
Shares issued (note 18) 2.1 0.6
Dividends paid (note 21) (54.6) (35.9)
Issue of Tier 2 bond 148.9 -
Repayment of asset backed floating rate notes (2,313.1) (1,013.3)
Repayment of Tier 2 bond (153.7) -
Repayment of retail bond (60.0) -
Movement on central bank facilities 964.6 860.0
Movement on other bank facilities 71.9 (130.1)
Capital element of lease payments (2.5) (2.0)
Purchase of shares (note 20) (42.2) (5.2)
Sale of shares - 0.2
Net cash (utilised) by financing activities (1,438.6) (325.7)
25. RELATED PARTY TRANSACTIONS
During the year, certain non-executive directors of the Group were
beneficially interested in savings deposits made with Paragon Bank, on the
same terms as were available to members of the public. Deposits of £16,000
were outstanding at the year-end (2020: £301,000), and the maximum amount
outstanding during the year was £301,000 (2020: £500,000).
The Paragon Pension Plan ('the Plan') is a related party of the Group.
Transactions with the Plan are described in note 17.
The Group had no other transactions with related parties other than key
management compensation.
NOTES TO THE ACCOUNTS - CAPITAL AND FINANCIAL RISK
For the year ended 30 September 2021
The notes below describe the processes and measurements which the Group use to
manage their capital position and its exposure to credit risk. It should be
noted that certain capital measures, which are presented to illustrate the
Group's position, are not subject to audit. Where this is the case, the
relevant disclosures are marked as such.
26. Capital management
The Group's objectives in managing capital are:
· To ensure that the Group has sufficient capital to meet its
operational requirements and strategic objectives
· To safeguard the Group's ability to continue as a going concern, so
that it can continue to provide returns to shareholders and benefits for other
stakeholders
· To provide an adequate return to shareholders by pricing products and
services commensurately with the level of risk
· To ensure that sufficient regulatory capital is available to meet any
externally imposed requirements
The Group's response to the Covid situation has been planned and executed with
the protection of its capital base and its long-term viability as key
strategic priorities.
The Group sets its target amount of capital in proportion to risk,
availability, regulatory requirements and cost. The Group manages the capital
structure and makes adjustments to it in the light of changes in economic
conditions and the risk characteristics of the underlying assets, having
particular regard to the relative costs and availability of debt and equity
finance at any given time. In order to maintain or adjust the capital
structure the Group may adjust the amount of dividends paid to shareholders,
return capital to shareholders, issue new shares, issue or redeem other
capital instruments, such as retail or corporate bonds, or sell assets to
reduce debt.
The Group is subject to regulatory capital rules imposed by the PRA on a
consolidated basis as a group containing an authorised bank. This is discussed
further below.
(a) 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 an individual capital requirement setting an amount of regulatory
capital, which the Group is required to hold in order to safeguard depositors
from loss in the event of severe losses being incurred by the Group. This
comprises variable elements based on its total risk exposure and also fixed
elements. This requirement is set in accordance with the international Basel
III rules, issued by the BCBS and currently implemented in UK law by EU
Regulation 575/2013, referred to as the CRR. Following the UK's exit from the
EU in December 2020 the PRA launched a consultation in February 2021 which
would result in the Basel III rules being applied in the UK through the PRA
Rulebook.
The Group's regulatory capital is monitored by the Board, its Risk and
Compliance Committee and the ALCO, who ensure that appropriate action is taken
to ensure compliance with the regulator's requirements. The future regulatory
capital requirement is also considered as part of the Group's forecasting and
strategic planning process.
The Group has elected to take advantage of the IFRS 9 transitional
arrangements set out in Article 473a of the CRR, which allow the capital
impact of expected credit losses to be phased in over a five-year period. The
phase-in factors applying to transition adjustments will allow for a 95% add
back to CET1 capital and Risk Weighted Assets ('RWA') in the financial year
ended 30 September 2019, reducing to 85%, 70%, 50% and 25% for the financial
years ending in 2020 to 2023, with full recognition of the impact on CET1
capital in the 2024 financial year.
As part of the regulatory response to Covid, Article 473a was revised to
extend the transitional arrangements for Stage 1 and Stage 2 impairment
provisions created in the financial year ended 30 September 2020 and the
financial year ending 30 September 2021, while maintaining the transitional
arrangements for impairment provisions created before the current period. In
order to increase institutions lending capacity in the short term, the EU has
determined that these additional provisions should be phased into capital over
the financial years ending 30 September 2022 to 30 September 2024, rather
than recognising the reduction in capital immediately.
These responses also allow, under paragraph 7a of the Article, the impact of
transitional adjustments to be weighted at 100% in calculating RWA. The Group
has taken advantage of this derogation and hence the IFRS 9 adjustment to RWA
is equal to the adjustment to capital at 30 September 2021 and 30 September
2020.
Where these reliefs are taken, firms are also required to disclose their
capital positions calculated as if the relief were not available (the 'fully
loaded' basis).
The tables below demonstrate that at 30 September 2021 the Group's regulatory
capital of £1,205.8m (2020: £1,141.2m) exceeded the amounts required by the
regulator, including £604.2m (2020: £749.6m) in respect of its Total Capital
Requirement ('TCR'), which is comprised of fixed and variable elements
(amounts not subject to audit).
The total regulatory capital at 30 September 2021 on the fully loaded basis of
£1,176.1m (2020: £1,098.9m) was in excess of the TCR of £601.8m (2020:
£745.3m) on the same basis (amounts not subject to audit).
During the year the Group's TCR reduced from 10.8% of Total Risk Exposure
('TRE') at 30 September 2020 to 8.8% of TRE at 30 September 2021, principally
as a result of the regulator's most recent review of the Group's risk profile
and exposures.
The CRR also requires firms to hold additional capital buffers, including a
Capital Conservation Buffer of 2.5% of risk weighted assets (at 30 September
2021) (2020: 2.5%) and a Counter-Cyclical Buffer ('CCyB'), currently 0.0% of
risk weighted assets (2020: 0.0%). The long‑term rate of the UK CCyB in a
standard risk environment is expected to be 2.0%. Firm specific buffers may
also be required.
The Group's regulatory capital differs from its equity as certain adjustments
are required by the regulator. A reconciliation of the Group's equity to its
regulatory capital determined in accordance with CRD IV at 30 September 2021
is set out below.
Note Regulatory basis Fully loaded basis
2021 2020 2021 2020
£m £m £m £m
Total equity 1,241.9 1,156.0 1,241.9 1,156.0
Deductions
Proposed final dividend 21 (46.6) (36.4) (46.6) (36.4)
IFRS 9 transitional relief * 29.7 42.3 - -
Intangible assets 13 (170.5) (170.1) (170.5) (170.1)
Software relief † 1.4 - 1.4 -
Prudent valuation adjustments
§ (0.1) (0.6) (0.1) (0.6)
Common Equity Tier 1 ('CET1') capital
1,055.8 991.2 1,026.1 948.9
Other tier 1 capital - - - -
Total Tier 1 capital 1,055.8 991.2 1,026.1 948.9
Corporate bond 150.0 150.0 150.0 150.0
Eligibility cap Ф - - - -
Total Tier 2 capital 150.0 150.0 150.0 150.0
Total regulatory capital ('TRC')
1,205.8 1,141.2 1,176.1 1,098.9
* Firms are permitted to phase in the impact of IFRS 9
transition as described above.
§ For capital purposes, assets and liabilities held at fair
value, such as the Group's derivatives, are required to be valued on a more
conservative basis than the market value basis set out in IFRS 13. This
difference is represented by the prudent valuation adjustment above,
calculated using the 'Simplified Approach' set out in the CRR.
† Under a relief enacted by the EU in December 2020 an
amount in respect of software assets in intangibles is added back to capital.
This is calculated in accordance with Article 36 (1) (b) of the CRR. In July
2021 the PRA reaffirmed its view that software assets would not absorb losses
effectively in a stress. It therefore commenced a consultation on a proposal
to remove this relief with effect from 1 January 2022.
Ф CRD IV restricts the amount of tier 2 capital which is
eligible for regulatory purposes to 25% of TCR.
The total risk exposure amount calculated under the CRD IV framework against
which this capital is held, and the proportion of these assets it represents,
are calculated as shown below.
Regulatory basis Fully loaded basis
2021 2020 2021 2020
£m £m £m £m
Credit risk
Balance sheet assets 6,073.5 6,171.7 6,073.5 6,171.7
Off balance sheet 143.9 104.1 143.9 104.1
IFRS 9 transitional relief 29.7 42.3 - -
Total credit risk 6,247.1 6,318.1 6,217.4 6,275.8
Operational risk 576.0 544.3 576.0 544.3
Market risk - - - -
Other 13.7 85.7 13.7 85.7
Total risk exposure amount ('TRE')
6,836.9 6,948.1 6,807.2 6,905.8
Solvency ratios % % % %
CET1 15.4 14.3 15.1 13.7
TRC 17.6 16.4 17.3 15.9
This table is not subject to audit
The CRD IV risk weightings for credit risk exposures are currently calculated
using the Standardised Approach ('SA'). The Basic Indicator Approach is used
for operational risk.
The table below shows the calculation of the UK leverage ratio, based on the
consolidated balance sheet assets adjusted as shown. The PRA has proposed a
minimum UK leverage ratio of 3.25% for UK firms, with retail deposits of over
£50.0 billion. In addition, in October 2021 the PRA stated its expectation
that all other UK firms should manage their leverage risk so that this ratio
does not ordinarily fall below 3.25%
Note 2021 2020
£m £m
Total balance sheet assets 15,137.0 15,505.5
Less: Derivative assets 12 (44.2) (463.3)
Central bank deposits 9 (1,142.0) (1,637.1)
CRDs (23.7) (15.1)
Accrued interest on sovereign exposures - -
On-balance sheet items 13,927.1 13,390.0
Less: Intangible assets 13 (170.5) (170.1)
Add back: Software relief 1.4 -
Total on balance sheet exposures 13,758.0 13,219.9
Derivative assets 12 44.2 463.3
Potential future exposure on derivatives 36.3 92.3
Total derivative exposures 80.5 555.6
Post offer pipeline at gross notional amount 1,380.3 949.1
Adjustment to convert to credit equivalent amounts
(1,128.3) (773.8)
Off balance sheet items 252.0 175.3
Tier 1 capital 1,055.8 991.2
Total leverage exposure before IFRS 9 relief 14,090.5 13,950.8
IFRS 9 relief 29.7 42.3
Total leverage exposure 14,120.2 13,993.1
UK leverage ratio 7.5% 7.1%
This table is not subject to audit
The fully loaded leverage ratio is calculated as follows
2021 2020
£m £m
Fully loaded Tier 1 capital 1,026.1 948.9
Total leverage exposure before IFRS 9 relief 14,090.5 13,950.8
Fully loaded UK leverage exposure 7.3% 6.8%
This table is not subject to audit
The UK leverage ratio is prescribed by the PRA and differs from the leverage
ratio defined by Basel and the CRR due to the exclusion of central bank
balances from exposures.
The regulatory capital disclosures in these financial statements relate only
to the consolidated position for the Group. Individual entities within the
Group are also subject to supervision on a standalone basis. All such entities
complied with the requirements to which they were subject during the year.
(b) Return on tangible equity ('RoTE')
RoTE is a measure of an entity's profitability used by investors. RoTE is
defined by the Group by comparing the profit after tax for the year, adjusted
for amortisation charged on intangible assets, to the average of the opening
and closing equity positions, excluding intangible assets and goodwill.
It effectively reflects a return on equity as if all intangible assets are
eliminated immediately against reserves. As this is similar to the approach
used for the capital of financial institutions it is widely used in the
sector.
The Group's consolidated RoTE for the year ended 30 September 2021 is derived
as follows:
Note 2021 2020
£m £m
Profit for the year after tax 164.5 91.3
Amortisation of intangible assets 2.0 2.0
Adjusted profit 166.5 93.3
Divided by
Opening equity 1,156.0 1,108.4
Opening intangible assets 13 (170.1) (171.1)
Opening tangible equity 985.9 937.3
Closing equity 1,241.9 1,156.0
Closing intangible assets 13 (170.5) (170.1)
Closing tangible equity 1,071.4 985.9
Average tangible equity 1,028.7 961.6
Return on Tangible Equity 16.2% 9.7%
This table is not subject to audit
(c) Dividend and distribution policy
The Company is committed to a long-term sustainable dividend policy.
Ordinarily, dividends will increase in line with earnings, subject to the
requirements of the business and the availability of cash resources. The Board
reviews the policy at least twice a year in advance of announcing its results,
taking into account the Group's strategy, capital requirements, principal
risks and the objective of enhancing shareholder value. In determining the
level of dividend for any year, the Board expects to follow the dividend
policy, but will also take into account the level of available retained
earnings in the Company, its cash resources and the cash and capital
requirements inherent in its business plans.
The distributable reserves of the Company comprise its profit and loss account
balance (note 19) and, other than the regulatory requirement to retain an
appropriate level of capital in Paragon Bank PLC, there are no restrictions
preventing profits elsewhere in the Group from being distributed to
the parent.
Since the year ended 30 September 2018, the Company has adopted a policy of
paying out approximately 40% of its basic earnings per share as dividend (a
dividend cover ratio of around 2.5 times), in the absence of any idiosyncratic
factors which might make such a dividend inappropriate. This policy is
reviewed by the Board at least annually. The Company considers it has access
to sufficient cash resources to pay dividends at this level and that its
distributable reserves are abundant for this purpose.
To provide greater transparency, the Board also adopted a policy of paying an
interim dividend in each year equivalent to half of the preceding final
dividend in the absence of any factors which might make such a distribution
inappropriate. After consideration of the Group's capital position an interim
dividend for the year of 7.2p per share was declared, in line with this policy
(2020: nil).
The Group's dividend and distribution decisions in the 2020 financial year
were dominated by the potential impact of the Covid pandemic. The strategic
decision to build capital in response to the inherent risks posed by the virus
meant that no interim dividend was declared for the year. However, at the 2020
year end a dividend was declared in line with the Group's stated policy.
The appropriate level of final dividend for the current year was considered by
the Board in light of economic and regulatory developments in the year, and
the various potential paths for the UK economy as the pandemic recedes. In
particular the levels of provision in the Group's loan portfolios and the
potential for further provision under stress were considered by the Board,
along with the capital impacts of stress testing carried out as part of the
ICAAP and forecasting processes, discounting the effects of the current
temporary reduction in regulatory buffers. On the basis of the analysis the
Board concluded that a dividend payment for the year of around 40% of
earnings, in line with policy, could be made.
The Board will therefore propose a final dividend for the year of 18.9p per
share (2020: 14.4p per share) for approval of the 2022 AGM, making a total
dividend for the year of 26.1p per share (2020: 14.4p per share).
In addition, at the time of approving the half year report in June 2021, the
Board authorised a buyback of up to £40.0 million of shares in the market,
initially to be held in treasury. This programme commenced that month, and by
the year end funds of £37.7m (including costs) had been disbursed. This
programme will be completed following the publication of the results for the
year.
At the time of approving the final dividend for the year the Board also
authorised a further buy-back programme of £50.0m. this programme will
commence after the completion of the June 2021 programme and the shares
purchased will initially be held in Treasury.
The dividend cover for the year, which is subject to approval at the
forthcoming AGM, is set out below.
Note 2021 2020
Earnings per share (p) 8 65.2 36.0
Proposed dividend per share in respect of the year (p) 21 26.1 14.4
Dividend cover (times) 2.50 2.50
For the purposes of dividend policy, the Group defines dividend cover based on
basic earnings per share, adjusted where considered appropriate, and dividend
per share. This is the most common measure used by financial analysts.
The most recent policy review, in November 2021, also confirmed the existing
dividend policy would continue to apply for future periods, subject to the
impact of any future events, and the Board will consider the appropriateness
and scale of any interim dividend in the context of the Group's results and
the operating and economic environment at the time.
27. Credit risk
Loans to customers
The Group's credit risk is primarily attributable to its loans to customers
and its business objectives rely on maintaining a high-quality customer base
and place strong emphasis on good credit management, both at the time of
acquiring or underwriting a new loan, where strict lending criteria are
applied, and throughout the loan's life.
The Group's balance sheet loan assets at 30 September 2021 are analysed as
follows:
2021 2020
£m % £m %
Buy-to-let mortgages 11,424.3 85.2% 10,583.8 83.8%
Owner-occupied mortgages 36.3 0.3% 53.1 0.4%
Total first charge residential mortgages 11,460.6 85.5% 10,636.9 84.2%
Second charge mortgage loans 281.7 2.1% 354.5 2.8%
Loans secured on residential property 11,742.3 87.6% 10,991.4 87.0%
Development finance 608.2 4.5% 609.0 4.8%
Loans secured on property 12,350.5 92.1% 11,600.4 91.8%
Asset finance loans 440.5 3.3% 452.0 3.6%
Motor finance loans 229.2 1.7% 272.4 2.2%
Aircraft mortgages 28.2 0.2% 26.0 0.2%
Structured lending 118.9 0.9% 94.9 0.7%
Invoice finance 20.9 0.2% 13.5 0.1%
Total secured loans 13,188.2 98.4% 12,459.2 98.6%
Professions finance 33.1 0.3% 22.3 0.2%
RLS, CBILS and BBLS 83.8 0.6% 25.2 0.2%
Other unsecured commercial loans 10.3 0.1% 15.0 0.1%
Unsecured consumer loans 87.3 0.6% 109.7 0.9%
Total loans to customers 13,402.7 100.0% 12,631.4 100.0%
First and second charge mortgages are secured by charges over residential
properties in England and Wales, or similar Scottish or Northern Irish
securities.
Development finance loans are secured by a first charge (or similar Scottish
security) over the development property and various charges over the build.
Asset finance loans and motor finance loans are effectively secured by the
financed asset, while aircraft mortgages are secured by a charge on the
aircraft funded.
Structured lending and invoice finance balances are effectively secured over
the assets of the customer, with security enhanced by maintaining balances at
a level less than the total amount of the security (the advance percentage).
Professions finance are generally short term unsecured loans made to firms of
lawyers and accountants for working capital purposes.
Loans made under the RLS, the CBILS and the BBLS have the benefit of a
guarantee underwritten by the UK Government.
Other unsecured consumer loans include unsecured loans either advanced by
Group companies or acquired from their originators at a discount.
There are no significant concentrations of credit risk to individual
counterparties due to the large number of customers included in the
portfolios. All lending is to customers within the UK. The total gross
carrying value of the Group's loans to customers due from customers with total
portfolio exposures over £10.0m is analysed below by product type.
2021 2020
£m £m
Buy-to-let mortgages 163.3 154.3
Development finance 217.9 240.0
Structured lending 108.7 72.7
Asset finance 10.4 -
500.3 467.0
The threshold of £10.0m is used internally for monitoring large exposures.
Credit grading
An analysis of the Group's loans to customers by absolute level of credit risk
at 30 September 2021 is set out below. The analysed amount represents gross
carrying amount.
Stage 1 Stage 2 Stage 3 POCI Total
£m £m £m £m £m
30 September 2021
Very low risk 9,834.5 563.8 1.3 41.9 10,441.5
Low risk 1,716.9 532.2 78.5 16.3 2,343.9
Moderate risk 149.2 130.2 3.8 22.4 305.6
High risk 42.0 23.7 11.6 21.7 99.0
Very high risk 42.0 27.5 62.0 17.4 148.9
Not graded 115.8 1.7 7.1 4.6 129.2
Total gross carrying amount 11,900.4 1,279.1 164.3 124.3 13,468.1
Impairment (15.0) (11.3) (38.9) (0.2) (65.4)
Total loans to customers 11,885.4 1,267.8 125.4 124.1 13,402.7
30 September 2020
Very low risk 8,771.2 453.3 20.8 45.9 9,291.2
Low risk 1,229.2 120.9 10.7 21.7 1,382.5
Moderate risk 742.2 184.7 12.1 32.8 971.8
High risk 285.2 143.9 50.7 32.0 511.8
Very high risk 48.3 67.9 49.9 22.9 189.0
Not graded 253.6 74.7 31.9 6.7 366.9
Total gross carrying amount 11,329.7 1,045.4 176.1 162.0 12,713.2
Impairment (22.2) (15.8) (43.4) (0.4) (81.8)
Total loans to customers 11,307.5 1,029.6 132.7 161.6 12,631.4
Gradings above are based on credit scorecards or internally assigned risk
ratings as appropriate for the individual asset class. These measures are
calibrated across product types and used internally to monitor the Group's
overall credit risk profile against its risk appetite.
These gradings represent current credit quality on an absolute basis and this
may result in assets in higher IFRS 9 stages with low risk grades, especially
where a case qualifies through breaching, for example, an arrears threshold
but is making regular payments. This will apply especially to Stage 3 cases
reported in note 11, other than those shown as 'realisations'.
Examples of lower risk cases in higher IFRS 9 stages include fully up-to-date
receiver of rent cases; accounts where the customer is in arrears on their
account with the Group but up to date on accounts with other lenders, creating
an overall positive credit rating; and accounts where the default on the
Group's loan has yet to impact on external credit score.
A small proportion of the loan book (2021: 1.0%, 2020: 2.9%) is classed as
'not graded' above. This rating relates to loans that have been fully
underwritten at origination but where the customer falls outside the automated
assessment techniques used post-completion.
Credit characteristics by portfolio
Loans secured on residential property
First mortgage loans have a contractual term of up to thirty years and second
charge mortgage loans up to twenty five years. In all cases the customer is
entitled to settle the loan at any point and in most cases early settlement
does take place. All customers on these accounts are required to make monthly
payments.
An analysis of the indexed LTV ratio for those loan accounts secured on
residential property by value at 30 September 2021 is set out below. LTVs for
second charge mortgages are calculated allowing for the interest of the first
charge holder, based on the most recent first charge amount held by the Group,
while for acquired accounts the effect of any discount on purchase is allowed
for.
First charge Second charge mortgages
mortgages
2021 2020 2021 2020
% % % %
Loan to value ratio
Less than 70% 83.8 59.9 88.4 74.5
70% to 80% 14.3 35.9 8.5 16.7
80% to 90% 0.5 2.3 1.5 5.2
90% to 100% 0.3 0.4 0.6 1.2
Over 100% 1.1 1.5 1.0 2.4
100.0 100.0 100.0 100.0
Average LTV ratio 61.1 65.7 56.1 62.2
Of which:
Buy-to-let 61.2 65.8
Owner-occupied 42.0 49.2
The regionally indexed LTVs shown above are affected by changes in house
prices, with the Nationwide house price index, for the UK as a whole,
registering an annual increase of 10.0% in the year ended 30 September 2021
(2020: 5.0%).
The geographical distribution of the Group's residential mortgage assets by
gross carrying value is set out below.
First Charge Second Charge
2021 2020 2021 2020
% % % %
East Anglia 3.3 3.2 3.3 3.3
East Midlands 5.5 5.4 6.3 6.1
Greater London 18.5 18.7 7.8 8.2
North 3.1 3.2 4.0 3.9
North West 10.3 10.4 7.4 7.4
South East 31.8 31.6 39.3 39.5
South West 8.7 8.7 8.3 8.0
West Midlands 5.5 5.4 7.1 7.3
Yorkshire and Humberside 8.1 8.4 6.0 5.9
Total England 94.8 95.0 89.5 89.6
Northern Ireland 0.1 0.1 1.8 1.7
Scotland 2.0 1.7 5.2 5.2
Wales 3.1 3.2 3.5 3.5
100.0 100.0 100.0 100.0
Development finance
Development finance loans have an average term of 21 months (2020: 21 months).
Settlement of principal and accrued interest takes place once the development
is sold or refinanced following its completion and the customer is not
normally required to make payments during the term of the loan. The loans are
secured by a legal charge over the site and/or property together with other
charges and warranties related to the build.
As customers are not required to make payments during the life of the loan,
arrears and past due measures cannot be used to monitor credit risk. Instead,
cases are monitored on an individual basis against the costs and progress in
the agreed development programme by management and Credit Risk. The average
loan to gross development value ('LTGDV') ratio for the portfolio at year end,
a measure of security cover, is analysed below.
2021 2021 2020 2020
By value By number By value By number
LTGDV % % % %
50% or less 2.9 5.3 7.6 4.8
50% to 60% 27.3 20.6 22.4 13.2
60% to 65% 44.3 49.4 34.0 41.0
65% to 70% 22.8 21.9 31.3 36.1
70% to 75% 1.4 1.6 2.8 4.0
Over 75% 1.3 1.2 1.9 0.9
100.0 100.0 100.0 100.0
The average LTGDV cover at the year end was 61.7% (2020: 63.1%).
LTGDV is calculated by comparing the current expected end of term exposure
with the latest estimate of the value of the completed development based on
surveyors' reports. The focus on residential property development within the
portfolio means that asset values will generally move in line with the UK
residential property market.
At 30 September 2021, the development finance portfolio comprised 247 accounts
(2020: 229) with a total carrying value of £608.2m (2020: £609.0m). Of these
accounts only 10 were included in Stage 2 at 30 September 2021 (2020: seven),
with no accounts classified as Stage 3 (2020: one). In addition, account one
acquired had been classified as POCI (2020: one). An allowance for this loss
was made in the IFRS 3 fair value calculation.
The geographical distribution of the Group's development finance loans by
gross carrying value is set out below.
2021 2020
% %
East Anglia 3.6 5.1
East Midlands 6.3 5.5
Greater London 6.1 8.2
North 2.4 1.8
North West 1.1 0.4
South East 57.5 58.8
South West 13.5 14.0
West Midlands 4.8 4.0
Yorkshire and Humberside 3.5 1.1
Total England 98.8 98.9
Northern Ireland - -
Scotland 1.2 1.1
Wales - -
100.0 100.0
Asset finance and motor finance
Asset and motor finance lending includes finance lease and hire purchase
arrangements, which are accounted for as finance leases under IFRS 16. The
average contractual life of the asset finance loans was 51 months (2020: 52
months) while that of the motor finance loans was 64 months (2020: 60 months),
but it is likely that a significant proportion of customers will choose to
settle their obligations early.
Asset finance customers are generally small or medium sized businesses. The
nature of the assets underlying the Group's asset finance lending by gross
carrying value is set out below.
2021 2020
% %
Commercial vehicles 33.4 32.0
Construction plant 34.2 33.7
Technology 7.0 6.9
Manufacturing 6.2 6.7
Print and paper 2.3 3.7
Refuse disposal vehicles 4.3 4.8
Other vehicles 4.3 3.6
Agriculture 3.1 2.9
Other 5.2 5.7
100.0 100.0
Motor finance loans are secured over cars, motorhomes and light commercial
vehicles and represent exposure to consumers and small businesses.
Structured lending
The Group's structured lending division provides revolving loan facilities to
support non-bank lending businesses. Loans are made to a Special Purpose
Vehicle ('SPV') company controlled by the customer and effectively secured on
the loans made by the SPV. Exposure is limited to a percentage of the
underlying assets, providing a buffer against credit loss.
Summary details of the structured lending portfolio are set out below.
2021 2020
Number of active facilities 8 8
Total facilities (£m) 185.5 139.0
Carrying value (£m) 118.9 94.9
The maximum advance under these facilities was 80% of the underlying assets.
These accounts do not have a requirement to make regular payments, operating
on a revolving basis. The performance of each loan is monitored monthly on a
case by case basis by the Group's Credit Risk function, assessing compliance
with covenants relating to both the customer and the performance and
composition of the asset pool. These assessments, which are reported to Credit
Committee, are used to inform the assessment of expected credit loss under
IFRS 9.
At 30 September 2021, one of these facilities was identified as Stage 2 (2020:
four) with the remainder in Stage 1.
RLS, CBILS and BBLS
Loans under these schemes have the benefit of guarantees underwritten by the
UK Government, which launched them as a response to the impact of Covid on UK
SMEs.
CBILS and BBLS were launched in 2020 and remained open for new applications
until March 2021. RLS was launched in April 2021 as a successor scheme and is
expected to be available until June 2022.
The Group offered term loans and asset finance loans under the CBIL scheme.
Interest and fees are paid by the UK Government for the first twelve months
and the government guarantee covers up to 80% of the lender's principal loss
after the application of any proceeds from the asset financed (if applicable).
Loans under the BBL scheme are six year term loans at a standard 2.5% per
annum interest rate. The UK Government pays the interest on the loan for the
first twelve months and provides lenders with a guarantee covering the whole
outstanding balance.
The Group offers term loans and asset finance loans under the RLS. Interest
and fees are payable by the customer from inception. The Government guarantee
covers up to 80% of the lender's principal loss up, after the application of
any proceeds from the asset financed (if applicable), although the Government
has announced its intent to reduce this cover to 70% for applications received
after 1 January 2022.
The Group's outstanding RLS, CBILS and BBLS loans at 30 September 2021 were:
2021 2020
£m £m
RLS
Term loans 0.1 -
Asset finance 20.7 -
Total RLS 20.8 -
CBILS
Term loans 28.1 20.6
Asset finance 29.9 1.0
Total CBILS 58.0 21.6
BBLS 5.0 3.6
83.8 25.2
At 30 September 2021, only £0.2m of this balance was considered to be
non-performing (2020: £nil).
Unsecured consumer loans
Almost all of the Group's unsecured consumer loan assets are part of purchased
debt portfolios where the consideration paid will have been based on the
credit quality and performance of the loans at the point of the transaction.
Collections on purchased accounts remain in excess of those implicit in the
purchase prices.
Arrears performance
The number of accounts in arrears by asset class, based on the most commonly
quoted definition of arrears for the type of asset, at 30 September 2021 and
30 September 2020, compared to the industry averages at those dates published
by UK Finance ('UKF') and the FLA, was:
2021 2020
% %
First mortgages
Accounts more than three months in arrears
Buy-to-let accounts including receiver of rent cases 0.21 0.15
Buy-to-let accounts excluding receiver of rent cases 0.14 0.10
Owner-occupied accounts 4.48 3.72
UKF data for mortgage accounts more than three months in arrears
Buy-to-let accounts including receiver of rent cases 0.45 0.52
Buy-to-let accounts excluding receiver of rent cases 0.43 0.50
Owner-occupied accounts 0.85 0.90
All mortgages 0.78 0.82
Second charge mortgage loans
Accounts more than 2 months in arrears
All accounts 19.08 14.77
Post-2010 originations 1.18 0.62
Legacy cases (Pre-2010 originations) 23.12 21.17
Purchased assets 24.76 17.85
FLA data for secured loans 8.60 8.40
Motor finance loans
Accounts more than 2 months in arrears
All accounts 4.15 4.58
Originated cases 2.30 1.76
Purchased assets 14.07 13.10
Asset finance loans
Accounts more than 2 months in arrears 0.27 1.75
FLA data for business lease / hire purchase loans 0.60 1.70
No published industry data for asset classes comparable to the Group's other
books has been identified. Where revised data at 30 September 2020 has been
published by the FLA or UKF, the comparative industry figures above have been
amended.
Arrears information is not given for development finance, structured lending
or invoice finance activities as the structure of the products means that such
a measure is not appropriate.
It should be noted that, where customers were allowed to defer payments as
part of Covid reliefs, these deferrals were not classified as arrears, in
accordance with regulatory guidance.
Few of the arrangements remained in place at 30 September 2021, meaning that
some of the increases shown above will relate to the suppression of arrears at
the previous year end.
The Group calculates its headline arrears measure for buy-to-let mortgages,
shown above, based on the numbers of accounts three months or more in arrears,
including purchased Idem Capital assets, but excluding those cases in
possession and receiver of rent cases designated for sale. This is consistent
with the methodology used by UKF in compiling its statistics for the
buy-to-let mortgage market as a whole.
The number of accounts in arrears will naturally be higher for legacy books,
such as the Group's legacy second charge mortgages and residential first
mortgages than for comparable active ones, as performing accounts pay off
their balances, leaving arrears accounts representing a greater proportion of
the total.
The figures shown above for secured loans incorporate purchased portfolios
which generally include a high proportion of cases in arrears at the time of
purchase and where this level of performance is allowed for in the discount to
current balance represented by the purchase price. However, this will lead to
higher than average reported arrears.
Acquired assets
Almost all the Group's unsecured consumer loan assets are part of purchased
debt portfolios where the consideration paid was based on the credit quality
and performance of the loans at the point of the transaction. No additional
loans to customers treated as POCI were acquired in the year ended 30
September 2021.
Collections on purchased accounts have been comfortably in excess of those
implicit in the purchase prices.
In the debt purchase industry, ERCs is commonly used as a measure of the value
of a portfolio. This is defined as the sum of the undiscounted cash flows
expected to be received over a specified future period. In the Group's view,
this measure may be suitable for heavily discounted, unsecured, distressed
portfolios (which will be treated as POCI under IFRS 9), but is less
applicable for the types of portfolio in which the Group has invested, where
cash flows are higher on acquisition, loans may be secured on property and
customers may not be in default. In such cases, the IFRS 9 amortised cost
balance, at which these assets are carried in the Group balance sheet,
provides a better indication of value.
However, to aid comparability, the 84 and 120 month ERCs value for the Group's
purchased consumer loan assets, are set out below. These are derived using the
same models and assumptions used in the EIR calculations. ERCs are set out
both for all purchased consumer portfolios and for those classified as POCI
under IFRS 9.
2021 2020 2019
£m £m £m
All purchased consumer assets
Carrying value 185.2 235.3 291.1
84 month ERCs 221.2 277.8 342.3
120 month ERCs 245.2 313.7 387.5
POCI assets only
Carrying value 113.2 139.8 168.3
84 month ERCs 143.9 176.9 214.1
120 month ERCs 163.4 203.7 246.0
Amounts shown above are disclosed as loans to customers (note 10). They
include first mortgages, second charge mortgage loans and unsecured consumer
loans.
NOTES TO THE PRELIMINARY FINANCIAL INFORMATION - BASIS OF PREPARATION
For the year ended 30 September 2021
The notes set out below describe the accounting basis on which the Group
prepares its accounts, the particular accounting policies adopted by the Group
and the principal judgements and estimates which were required in the
preparation of the financial statements.
They also include other information describing how the preliminary financial
information have been prepared required by legislation and accounting
standards.
28. ACCOUNTING POLICIES
The preliminary financial information has been prepared on the basis of the
accounting policies used in the production of the financial statements for the
year. Therefore, they have been prepared on the basis of accounting policies
set out in the Annual Report and Accounts of the Group for the year ended 30
September 2020, except for the adoption of the amendments to IFRS 9 and IAS 39
described in note 29 below.
The Group is required to prepare its financial statements for the year ending
30 September 2021 in accordance with International Financial Reporting
Standards ('IFRS') in conformity with the requirements of the Companies Act
2006. They must also be prepared in accordance with IFRS adopted pursuant to
Regulation (EC) No 1606/2002 as it applies in the European Union ('EU'). In
the financial years reported on this will also mean that, in the Group's
circumstances, the financial statements also accord with IFRS as approved by
the International Accounting Standards Board.
The "requirements of the Companies Act 2006" here means accounts being
prepared in accordance with "international accounting standards" as defined in
section 474(1) of that Act, as it applied immediately before IP Completion Day
(the end of the UK's transition period following its departure from the EU)
('IPCD'), including where the Company also makes use of standards which have
been adopted for use within the United Kingdom in accordance with regulation
1(5) of the International Accounting Standards and European Public Limited
Liability Company (Amendment etc.) (EU Exit) Regulations 2019, subsequent to
the IPCD.
Under the Listing Rules of the FCA, despite the UK's exit from the EU on 31
January 2020, the EU endorsed IFRS regime remains applicable to the Group
until its first financial year commencing after the IPCD on 31 December 2020.
Therefore, while EU endorsed IFRS applies to these financial statements, those
for the year ending 30 September 2022 will instead be prepared under
'UK-adopted international accounting standards'.
The changes in the way that the basis of preparation is described, which
result from the UK's exit from the EU, including the move to UK-adopted
international accounting standards from the Group's financial year commencing
1 October 2021, do not represent a change in the basis of accounting which
would necessitate a prior year restatement.
Going concern basis
The going concern basis has been adopted in the preparation of this
preliminary financial information. The reasons for the adoption of this basis
are set out in note 31.
Comparability of information
The balance sheet information at 30 September 2019, was not required to be
restated on the adoption of IFRS 16 on 1 October 2020. The information
presented is derived in accordance with IAS 17 - 'Leases' ('IAS 17'), and
therefore may not be directly comparable with the balance sheets at 30
September 2021 and 30 September 2020 which are prepared under IFRS 16.
New and revised reporting standards
Other Standards and interpretations in issue but not effective do not address
matters relevant to the Group's accounting and reporting.
No new or revised reporting standards significantly affecting the Group's
accounting have been issued since the approval of the Group's financial
statements for the year ended 30 September 2020.
29. CHANGES IN ACCOUNTING STANDARDS
IAS 39 amendments 'Interest Rate Benchmark Reform'
In August 2020 the IASB issued a further amendment to IAS 39 'Interest Rate
Benchmark Reform - Phase 2'. This amendment sets out accounting requirements
for the treatment of IBOR-linked financial assets and liabilities under the
amortised cost method and IBOR related hedge accounting when a firm replaces
the IBOR linkage in the underlying instruments with a replacement benchmark.
It is therefore potentially applicable to the Group's LIBOR-linked loan assets
and those FRN liabilities where interest is charged on the basis of LIBOR or
other IBOR rates. It also affects the Group's LIBOR (and other IBOR)
referenced derivative assets and liabilities and the hedging relationships
which they form part of.
The intention of the standard is that, where the transition is effectively a
like for like replacement, no windfall gain or loss should occur on
transition, and hedging relationships should be able to continue.
This amendment is effective from the Group's financial year ending 30
September 2022 but has been endorsed by both the EU and the UK and has been
early adopted by the Group as permitted. The Group has utilised, and will
continue to utilise, the provisions of the amendment as it transitions its
IBOR-linked assets and liabilities. The impact of the amendment will depend
upon the IBOR related assets, liabilities and hedging relationships at the
point at which transition occurs.
30. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The most significant judgements which the directors have made in the
application of the accounting policies set out in note 28 relate to:
(a) Significant Increase in Credit Risk ('SICR')
Under IFRS 9, the directors are required to assess where a credit obligation
has suffered a Significant Increase in Credit Risk ('SICR'). The directors'
assessment is based primarily on changes in the calculated PD, but also
includes consideration of other qualitative indicators and the adoption of the
backstop assumption in the Standard that all cases which are more than 30 days
overdue have an SICR, for account types where days overdue is an
appropriate measure.
If additional accounts were determined to have an SICR, these balances would
attract additional impairment provision and the overall provision charge would
be higher.
In determining whether an account has an SICR in the Covid environment the
granting of Covid reliefs, including payment holidays and similar
arrangements, may mean that an SICR may exist without this being reflected in
either arrears performance or credit bureau data. The Group has accepted the
advice of UK regulatory bodies that the grant of Covid-related relief does
not, of itself, indicate an SICR, but has carefully considered internal credit
and customer data to determine whether there might be any accounts with SICR
not otherwise identified by the process.
Where accounts have received secondary periods of relief beyond the initial
three month period, this has generally been considered to be strongly
indicative of underlying problems and such accounts have been identified as
having an SICR. Furthermore, adjustments to correct probabilities of default
in models will also have a consequent result of identifying more SICRs.
More information on the definition of SICR adopted is given in note 11.
(b) Definition of default
In applying the impairment provisions of IFRS 9, the directors have used
models to derive the probabilities of default. In order to derive and apply
such models, it is required to define 'default' for this purpose. The Group's
definition of default is aligned to its internal operational procedures. IFRS
9 provides a rebuttable presumption of default when an account is 90 days
overdue and this was used as the starting point for this exercise. Other
factors include account management activities such as appointment of a
receiver or enforcement procedures.
A combination of qualitative and quantitative measures was considered in
developing the definition of default.
If a different definition of default had been adopted the expected loss
amounts derived might differ from those shown in the accounts.
More information on the Group's definition of default adopted is given in note
11.
(c) Classification of financial assets
The classification of financial assets under IFRS 9 is based on two factors:
· The company's 'business model' - how it intends to generate cash and
profit from the assets
· The nature of the contractual cash flows inherent in the assets
Financial assets are classified as held at amortised cost, at fair value
through OCI, or at fair value through profit and loss.
For an asset to be held at amortised cost, the cash flows received from it
must comprise solely payments of principal and interest ('SPPI'). In effect,
this restricts this classification to 'normal' lending activities, excluding
arrangements where the lender may have a contingent return or profit share
from the activities funded. The Group has considered its products and
concluded that, as standard lending products, they fall within the SPPI
criteria.
This is because all the Group's lending arrangements involve the advancing of
amounts to customers, either as loans or finance lease products and the
receipt of repayments of principal and charges, where those charges are
calculated based on the amount loaned. There are no 'success fee' or other
compensation arrangements not linked to the loan principal.
The use of amortised cost accounting is also restricted to assets which a
company holds within a business model whose object is to collect cash flows
arising from them, rather than seek to profit by disposing of them (a 'Held to
Collect' model). The Group's strategy is to hold loan assets until they are
repaid or written off. Loan disposals are rare, and the Group does not manage
its assets in order to generate profits on sale. On this basis, it has
categorised its business model as Held to Collect.
Therefore, the Group has classified its customer loan assets as carried at
amortised cost.
Certain of the balances reported in the financial statements are based wholly
or in part on estimates or assumptions made by the directors. There is,
therefore, a potential risk that they may be subject to change in future
periods. The most significant of these are:
(d) Impairment losses on loans to customers
Impairment losses on loans are calculated based on statistical models, applied
to the present status, performance and management strategy for the loans
concerned which are used to determine each loan's PD and LGD.
Internal information used will include number of months arrears, qualitative
information, such as possession by a first charge holder on a second charge
mortgage or where a buy-to-let case is under the control of a receiver of
rent, the receiver's present and likely future strategy for the property (e.g.
keeping current tenants in place, refurbish and relet, immediate sale etc).
External information used includes customer specific data, such as credit
bureau information as well as more general economic data.
Key internal assumptions in the models relate to estimates of future cash
flows from customers' accounts, their timing and, for secured accounts, the
expected proceeds from the realisation of the property or other charged
assets. These cash flows will include payments received from the customer,
and, for buy-to-let cases where a receiver of rent is appointed, rental
receipts from tenants, after allowing for void periods and running costs.
These key assumptions are based on observed data from historical patterns and
are updated regularly based on new data as it becomes available.
In addition, the directors consider how appropriate past trends and patterns
might be in the current economic situation and make any adjustments they
believe are necessary to reflect current and expected conditions.
All of this information may be impacted by the ongoing effects of the Covid
pandemic, its economic effect on customers and the forms of the reliefs given
to ameliorate that impact. These may both change the underlying data and
impact on the derivation of metrics normally used to monitor credit
performance.
The accuracy of the impairment calculations would therefore be affected by
unexpected changes to the economic situation, variances between the models
used and the actual results, or assumptions which differ from the actual
outcomes. In particular, if the impact of economic factors such as employment
levels on customers is worse than is implicit in the model then the number of
accounts requiring provision might be greater than suggested by the model,
while falls in house prices, over and above any assumed by the model might
increase the provision required in respect of accounts currently provided.
Similarly, if the account management approach assumed in the modelling cannot
be adopted the provision required may be different.
In order to provide forward looking economic inputs to the modelling of the
ECL, the Group must derive a set of scenarios which are internally coherent.
The Group addresses these requirements using four distinct economic scenarios
chosen to represent the range of possible outcomes. These scenarios at 30
September 2021 have been derived in light of the current economic situation,
modelling a variety of possible outcomes as described in note 11. It should be
noted, however, that there remains a significant range of different opinions
amongst economists about the longer-term prospects for the UK and, while these
positions are converging, this is likely to remain the case for some time to
come.
The variables are used for two purposes in the IFRS 9 calculations:
· They are applied as inputs in the models which generate PD values,
where those found by statistical analysis to have the most predictive value
are used
· They are used as part of the calculation where the variable has a
direct impact on the expected loss calculation, such as the house price index
The economic variables will also inform assumptions about the Group's approach
to account management given a particular scenario.
In addition to uncertainty created by the economic scenarios, the Group
recognises that the present situation lies outside the range of situations
considered when it originally derived its IFRS 9 approach to impairment. It
therefore considered, for each class of asset, whether any adjustment to the
normal approach was required to ensure sufficient provision was created and
also reviewed other available data, both from account performance and customer
feedback to form a view of the underlying reasons for observed customer
behaviours and of their future intentions and prospects.
As a result of this exercise additional requirements for provision were
identified, to compensate for potential model weakness and to allow for
economic pressures in the wider economy which cannot be identified by a
modelled approach. By their nature such adjustments are less systematic and
therefore subject to a wider range of outturns. The nature and amounts of
these PMA's are set out in note 11.
The position after considering all these matters is set out in note 11,
together with further information on the Group's approach and sensitivity
analysis. The economic scenarios described above and their impact on the
overall provision are also set out in that note.
(e) Effective interest rates
In order to determine the EIR applicable to loans and borrowings an estimate
must be made of the expected life of each asset or liability and hence the
cash flows relating thereto, including those relating to early redemption
charges. For purchased loan accounts this will involve estimating the likely
future credit performance of the accounts at the time of acquisition. For each
portfolio a model is in place to ensure that income is appropriately spread.
The underlying estimates are based on historical data and reviewed regularly.
For purchased accounts historical data obtained from the vendor will be
examined. The accuracy of the EIR applied would therefore be compromised by
any differences between actual repayment profiles and those predicted, which
in turn would depend directly or indirectly (in the case of borrowings) on
customer behaviour.
To illustrate the potential variability of the estimate, the amortised cost
values were recalculated by changing one factor in the EIR calculation and
keeping all others at their current levels. This exercise indicated that:
· A reduction of the assumed average lives of loans secured on
residential property by three months would reduce balance sheet assets by
£12.0m (2020: £11.2m), while an increase of the assumed asset lives of such
assets by three months would increase balance sheet assets by £12.1m (2020:
£10.3m)
· An increase of 50% in the number of five year fixed rate buy-to-let
loan assets assumed to redeem before the end of the fixed rate period,
generating additional early redemption charges would increase balance sheet
assets by £11.2m (2020: £7.3m)
· A reduction (or increase) in estimated cash flows from purchased loan
assets of 5% would reduce (or increase) balance sheet assets by £7.1m (2020:
£9.4m)
As any of these changes would, in reality, be accompanied by movements in
other factors, actual outcomes may differ from these estimates.
(f) Impairment of goodwill
The carrying value of goodwill recognised on acquisitions is verified by use
of an impairment test based on the projected cash flows for the CGU, based on
management forecasts and other assumptions described in note 13, including a
discount factor.
The accuracy of this impairment calculation would therefore be compromised by
any differences between these forecasts and the levels of business activity
that the CGU is able to achieve in practice. As the Group forecasts are based
on the Group's central economic scenario, any variance from this will
potentially impact on the valuation. This test will also be affected by the
accuracy of the discount factor used.
The sensitivity of the impairment test to reasonably possible movements in
these assumptions is discussed in note 13.
(g) Retirement benefits
The present value of the retirement benefit obligation is derived from an
actuarial calculation which rests on a number of assumptions relating to
inflation, long-term return on investments and mortality. Where actual
conditions differ from those assumed the ultimate value of the obligation
would be different.
31. GOING CONCERN
Accounting standards require the directors to assess the Group's ability to
continue to adopt the going concern basis of accounting. In performing this
assessment, the directors consider all available information about the future,
the possible outcomes of events and changes in conditions and the
realistically possible responses to such events and conditions that would be
available to them, having regard to the 'Guidance on Risk Management, Internal
Control and Related Financial and Business Reporting' published by the
Financial Reporting Council in September 2014.
Particular focus is given to the Group's financial forecasts to ensure the
adequacy of resources available for the Group to meet its business objectives
on both a short term and strategic basis. The guidance requires that this
assessment covers a period of at least twelve months from the date of approval
of these financial statements.
The Group makes extensive use of stress testing in compiling and reviewing its
forecasts. This stress testing approach was reviewed in detail during the year
as part of the annual ICAAP cycle, where testing considered the impact of a
number of severe but plausible scenarios. During the planning process,
sensitivity analysis was carried out on a number of key assumptions that
underpin the forecast to evaluate the impact of the Group's principal risks.
The key stresses modelled in detail to evaluate the forecast were:
· Increased business volumes ─ An increase of 20% in buy-to-let
application volumes. This examined the impact of volumes on profitability and
illustrated the extent to which capital resources and liquidity would be
stretched due to the higher cash and capital requirements
· Higher funding costs - 25bps higher cost on all new savings deposits
throughout. This scenario illustrated the impact of a significant prolonged
margin squeeze on profitability and whether this would cause significant
impacts on any capital, liquidity or encumbrance ratios
· Lower development finance growth - 50% lower loan book growth across
the plan horizon coupled with a 50bp margin reduction. This scenario
replicated a significant increase in competition within the sector,
illustrating the impact of a lower proportion of the high-yielding development
finance product in the Group's long-term asset mix on contribution to costs
and other key ratios for the Group
· Higher buy-to-let redemptions - double redemption rates on all
cohorts for the first three months post-reversion. With a significant volume
of five-year fixes coming to an end in 2022, this scenario highlighted the
potential risk that is inherent in the accounting difference between current
and amortised cost balances on such loans, and invited discussion as to what
mitigating action could be taken to avoid such an impact
· High impairment ─ a stress that modelled the IFRS 9 year end
severe scenario across the plan horizon, simulating a significant short-term
capital and profitability shock with prolonged house price deflation, but
maintaining the same lending levels as the base case. This scenario is
described in more detail in Note 11 and is derived from, but more severe than
the stress testing scenario published by the Bank of England in January 2021.
Although it is not deemed likely that such a scenario would materialise, since
severe stresses almost always result in lower lending volumes, the output from
this stress provides a benchmark for a plausible worst-case position that
impacts all aspects of business performance and ratios, in particular, capital
These stresses did not take account of management actions which might mitigate
the impact of the adverse assumptions used. They were designed to demonstrate
how such stresses would affect the Group's financing, capital and liquidity
positions and highlight any areas which might impact the Group's going concern
and viability assessments. Under all these scenarios, the Group had the
ability to meet its obligations over the forecast horizon and maintain a
surplus over its regulatory requirements for both capital and liquidity
through normal balance sheet management activities.
As part of the ICAAP process the Group also assessed the potential operational
risks it could face. This was done through the analysis of the impact and cost
of a series of severe but plausible scenarios. This analysis did not highlight
any factors which cast doubt on the Group's ability to continue as a
going concern.
The Group begins the forecast period with a strong capital and liquidity
position, enabling the management of any significant outflows of deposits and
/ or reduced inflows from customer receipts. Overall, the forecasts, even
under reasonable further levels of stress show the Group retaining sufficient
equity, capital, cash and liquidity throughout the forecast period to satisfy
its regulatory and operational requirements.
The availability of funding and liquidity is a key consideration, including
retail deposit, wholesale funding, central bank and other contingent liquidity
options.
The Group's retail deposits of £9,300.4m (note 14), raised through Paragon
Bank, are repayable within five years, with 77.6% of this balance (£7,212.9m)
payable within twelve months of the balance sheet date. The liquidity exposure
represented by these deposits is closely monitored; a process supervised by
the Asset and Liability Committee. The Group is required to hold liquid assets
in Paragon Bank to mitigate this liquidity risk. At 30 September 2021 Paragon
Bank held £942.7m of balance sheet assets for liquidity purposes, in the form
of central bank deposits. A further £150.0 million of liquidity was provided
by an off balance sheet swap arrangement, bringing the total to £1,092.7m.
Paragon Bank manages its liquidity in line with the Board's risk appetite and
the requirements of the PRA, which are formally documented in the Board's
approved ILAAP, updated annually. The Bank maintains a liquidity framework
that includes a short to medium term cash flow requirement analysis, a
longer-term funding plan and access to the Bank of England's liquidity
insurance facilities, where pre-positioned assets would support drawings of
£1,424.2m. Holdings of the Group's own externally rated mortgage backed loan
notes can also be used to access the Bank of England's liquidity facilities or
other funding arrangements. At 30 September 2021 the Group had £529.2m of
such notes available for use, of which £287.0m were rated AAA. The available
AAA notes would give access to £149.3m if used to support drawings on Bank of
England facilities.
The Group's securitisation funding structures provide match funding for part
of the asset base. Repayment of the securitisation borrowings is restricted to
funds generated by the underlying assets and there is limited recourse to the
Group's general funds. Recent and current loan originations are financed
through retail deposits and may be refinanced through securitisation where
this is appropriate and cost-effective. While the Group has not accessed the
public securitisation market in the year, the market remains active with
strong levels of demand and the Group maintains the infrastructure required to
access it.
The earliest maturity of any of the Group's bond debt is the £125.0m retail
bond, due January 2022. £69.0m of TFS debt was paid down after the year end
and all other central bank debt was refinanced and is not payable until 2025.
The Group's access to debt is enhanced by its corporate BBB rating, affirmed
by Fitch Ratings in March 2021, and its status as an issuer is evidenced by
the BB+ rating of its £150.0 million Tier 2 bond issued in the year. It has
regularly accessed the capital markets for warehouse funding and corporate and
retail bonds over recent years and continues to be able to access these
markets.
The Group has access to the short-term repo market for liquidity purposes
which it uses from time to time, including during the financial year ended 30
September 2021.
The Group's cash analysis, which includes the impact of all scheduled debt and
deposit repayments, continues to show a strong position, even after allowing
scope for significant discretionary payments and capital distributions.
As described in note 26 the Group's capital base is subject to consolidated
supervision by the PRA the most recent review of the Group's capital position
and management systems resulted in a reduction of the minimum capital level.
Its capital at 30 September 2021 was in excess of regulatory requirements and
its forecasts indicate this will continue to be the case.
After performing this assessment, the directors concluded that there was no
material uncertainty as to whether the Group would be able to maintain
adequate capital and liquidity for at least twelve months following the date
of approval of these financial statements and consequently that it was
appropriate for them to continue to adopt the going concern basis in preparing
the financial statements of the Group.
32. FINANCIAL ASSETS AND FINANCIAL LIABILITIES
The Group's financial assets and financial liabilities are valued on one of
two bases, defined by IFRS 9:
· Financial assets and liabilities carried at fair value through profit
and loss ('FVTPL')
· Financial assets and liabilities carried at amortised cost
IFRS 7 - 'Financial Instruments: Disclosures' requires that where assets are
measured at fair value these measurements should be classified using the fair
value hierarchy set out in IFRS 13 - 'Fair Value Measurement'. This hierarchy
reflects the inputs used and defines three levels:
· Level 1 measurements are unadjusted market prices
· Level 2 measurements are derived from directly or indirectly
observable data, such as market prices or rates
· Level 3 measurements rely on significant inputs which are not derived
from observable data
As quoted prices are not available for level 2 and 3 measurements, the
valuation is derived from cash flow models based, where possible, on
independently sourced parameters. The accuracy of the calculation would
therefore be affected by unexpected market movements or other variances in the
operation of the models or the assumptions used.
The Group had no financial assets or liabilities in the year ended 30
September 2021 or the year ended 30 September 2020 carried at fair value and
valued using level 3 measurements, other than contingent
consideration amounts (note 16).
The Group has not reclassified any of its measurements during the year.
The methods by which fair value is established for each class of financial
assets and liabilities are set out below.
(a) Assets and liabilities carried at fair value
The following table summarises the Group's financial assets and liabilities
which are carried at fair value.
Note 2021 2020
£m £m
Financial assets
Derivative financial assets 12 44.2 463.3
44.2 463.3
Financial liabilities
Derivative financial liabilities 12 43.9 132.4
Contingent consideration 16 7.5 13.5
51.4 145.9
All of these financial assets and financial liabilities are required to be
carried at fair value by IFRS 9.
Derivative financial assets and liabilities
Derivative financial instruments are stated at their fair values in the
accounts. The Group uses a number of techniques to determine the fair values
of its derivative assets and liabilities, for which observable prices in
active markets are not available. These are principally present value
calculations based on estimated future cash flows arising from the
instruments, discounted using a market interest rate, adjusted for risk as
appropriate.
The principal inputs to these valuation models are LIBOR and SONIA benchmark
interest rates for the currencies in which the instruments are denominated,
being sterling, EUR and dollars. The cross-currency basis swaps have a
notional principal related to the outstanding currency borrowings and
therefore the estimated rate of repayment of these notes also affects the
valuation of the swaps. However, variability in this input does not have a
significant impact on the valuation, compared to other inputs.
In order to determine the fair values, the management applies valuation
adjustments to observed data where that data would not fully reflect the
attributes of the instrument being valued, such as particular contractual
features or the identity of the counterparty. The management reviews the
models used on an ongoing basis to ensure that the valuations produced are
reasonable and reflect all relevant factors. These valuations are based on
market information and they are therefore classified as level 2 measurements.
Details of these assets are given in note 12.
Contingent consideration
The value of the contingent consideration balances shown in note 16 are
required to be stated at fair value in the accounts. These amounts are valued
based on the expected outcomes of the performance tests set out in the
respective sale and purchase agreements, discounted as appropriate. The most
significant inputs to these valuations are the Group's forecasts on future
activity relating to business generated by operational units acquired,
business derived as a result of the vendor's contacts or other goodwill and
any other new business flows which are or might be attributable to the
acquisition agreement, which are drawn from the overall Group forecasting
model. As such, these are classified as unobservable inputs and the valuations
classified as level 3 measurements.
(b) Assets and liabilities carried at amortised cost
The fair values for financial assets and financial liabilities held at
amortised cost, determined in accordance with the methodologies set out below
are summarised below.
Note 2021 2021 2020 2020
Carrying amount Fair Carrying amount Fair
value
value
£m £m £m £m
The Group
Financial assets
Cash 9 1,360.1 1,360.1 1,925.0 1,925.0
Loans to customers 10 13,402.7 13,470.6 12,631.4 12,856.1
Sundry financial assets 65.7 65.7 125.3 125.3
14,828.5 14,896.4 14,681.7 14,906.4
Financial liabilities
Short term bank borrowings 0.3 0.3 0.4 0.4
Asset backed loan notes 516.0 516.0 3,270.5 3,270.5
Secured bank borrowings 730.0 730.0 657.8 657.8
Retail deposits 14 9,300.4 9,308.5 7,856.6 7,900.6
Corporate and retail bonds 386.1 411.9 446.6 455.7
Other financial liabilities 16 66.3 66.3 74.6 74.6
10,999.1 11,033.0 12,306.5 12,359.6
The fair values of retail deposits and corporate and retail bonds shown above
will include amounts for the related accrued interest.
Cash, bank loans and securitisation borrowings
The fair values of cash and cash equivalents, bank loans and overdrafts and
asset backed loan notes, which are carried at amortised cost are considered to
be not materially different from their book values. In arriving at that
conclusion market inputs have been considered but because all the assets
mature within three months of the year end and the interest rates charged on
financial liabilities reset to market rates on a quarterly basis, little
difference arises. This also applies to the parent company's loans to its
subsidiaries.
While the Group's asset backed loan notes are listed, the quoted prices for an
individual note may not be indicative of the fair value of the issue as a
whole, due to the specialised nature of the market in such instruments and the
limited number of investors participating in it.
As these valuation exercises are not wholly market based, they are considered
to be level 2 measurements.
Loans to customers
To assess the likely fair value of the Group's loan assets in the absence of a
liquid market, the directors have considered the estimated cash flows expected
to arise from the Group's investments in its loans to customers based on a
mixture of market based inputs, such as rates and pricing and non-market based
inputs such as redemption rates. Given the mixture of observable and
non-observable inputs these are considered to be level 3 measurements.
Corporate debt
The Group's retail and corporate bonds are listed on the London Stock Exchange
and there is presently a reasonably liquid market in the instruments. It is
therefore appropriate to consider that the market price of these borrowings
constitutes a fair value. As this valuation is based on a market price, it is
considered to be a level 1 measurement.
Retail deposits
To assess the likely fair value of the Group's retail deposit liabilities, the
directors have considered the estimated cash flows expected to arise based on
a mixture of market based inputs, such as rates and pricing and non-market
based inputs such as withdrawal rates. Given the mixture of observable and
non-observable inputs, these are considered to be level 3 measurements.
Sundry assets and liabilities
Fair values of financial assets and liabilities disclosed as sundry assets and
sundry liabilities are not considered to be materially different to their
carrying values.
These assets and liabilities are of relatively low value and may be settled at
their carrying value at the balance sheet date or shortly thereafter.
APPENDICES TO THE PRELIMINARY ANNOUNCEMENT
For the year ended 30 September 2021
Additional financial information supporting the amounts shown in the
management report but not forming part of the preliminary financial
information.
A. Underlying results
The Group reports underlying profit excluding fair value accounting
adjustments arising from its hedging arrangements and certain one-off items of
income and costs relating to asset sales and acquisitions.
The fair value adjustments arise principally as a result of market interest
rate movements, outside the Group's control. They are profit neutral over time
and are not included in operating profit for management reporting purposes.
They are also disregarded by many external analysts.
The transactions relating to the asset disposals and acquisitions do not form
part of the day-to-day activities of the Group and, therefore, their removal
provides greater clarity on the Group's operational performance.
This definition of 'underlying' has been chosen following consideration of the
needs of investors and analysts following the Group's shares, and because
management feel it better represents the underlying economic performance of
the Group's business.
2021 2020
£m £m
Profit on ordinary activities before tax 213.7 118.4
Add back: Fair value adjustments (19.5) 1.6
Underlying profit 194.2 120.0
Underlying basic earnings per share, calculated on the basis of underlying
profit, charged at the overall effective tax rate, is derived as follows.
2021 2020
£m £m
Underlying profit 194.2 120.0
Tax at effective rate (note 7) (44.7) (27.5)
Underlying earnings 149.5 92.5
Basic weighted average number of shares (note 8) 252.3 253.6
Underlying earnings per share 59.3p 36.5p
Underlying return on tangible equity is derived using underlying earnings
calculated on the same basis.
2021 2020
£m £m
Underlying earnings 149.5 92.5
Amortisation of intangible assets 2.0 2.0
Adjusted underlying earnings 151.5 94.5
Average tangible equity (note 26(b)) 1,028.5 961.6
Underlying RoTE 14.7% 9.8%
B. income statement ratios
NIM and cost of risk (impairment charge as a percentage of average loan
balance) for the Group are calculated as follows:
Year ended 30 September 2021
Note Mortgage Lending Commercial Lending Idem Capital Total
£m £m £m £m
Opening loans to customers 10 10,819.5 1,514.8 297.1 12,631.4
Closing loans to customers 10 11,608.7 1,568.8 225.2 13,402.7
Average loans to customers 11,214.1 1,541.8 261.1 13,017.0
Net interest 219.2 94.5 20.2 310.5
NIM 1.95% 6.13% 7.74% 2.39%
Impairment provision (release) / charge 11 (5.9) 2.9 (1.7) (4.7)
Cost of risk (0.05)% 0.19% (0.65)% (0.04)%
Year ended 30 September 2020
Note Mortgage Lending Commercial Lending Idem Capital Total
£m £m £m £m
Opening loans to customers 10 10,344.1 1,452.1 389.9 12,186.1
Closing loans to customers 10 10,819.5 1,514.8 297.1 12,631.4
Average loans to customers 10,581.8 1,483.4 343.5 12,408.7
Net interest 190.0 82.1 26.1 278.1
NIM 1.80% 5.53% 7.60% 2.24%
Impairment provision charge 11 25.8 21.7 0.8 48.3
Cost of risk 0.24% 1.46% 0.23% 0.39%
Not all interest is allocated to segments (note 2).
C. COST:INCOME RATIO
Cost: income ratio is derived as follows:
Note 2021 2020
£m £m
Cost - operating expenses 135.4 126.8
Total operating income 324.9 295.1
Cost / Income 41.7% 43.0%
D. Net asset value
Note 2021 2020
Total equity (£m) 1,241.9 1,156.0
Outstanding issued shares (m) 18 262.5 261.8
Treasury shares (m) 20 (12.1) (5.2)
Shares held by ESOP schemes (m) 20 (3.7) (3.6)
246.7 253.0
Net asset value per £1 ordinary share £5.03 £4.57
Tangible equity (£m) 26 1,071.4 985.9
Tangible net asset value per £1 ordinary share £4.34 £3.90
CAUTIONARY STATEMENT
Sections of this preliminary announcement, including but not limited to the
management report may contain forward-looking statements with respect to
certain of the plans and current goals and expectations relating to the future
financial condition, business performance and results of the Group. These
statements can be identified by the fact that they do not relate strictly to
historical or current facts. They use words such as 'anticipate', 'estimate',
'expect', 'intend', 'will', 'project', 'plan', 'believe', 'target' and other
words and terms of similar meaning in connection with any discussion of future
operating or financial performance but are not the exclusive means of
identifying such statements. These have been made by the directors in good
faith using information available up to the date on which they approved this
report, and the Group undertakes no obligation to update or revise these
forward-looking statements for any reason other than in accordance with its
legal or regulatory obligations (including under the UK Market Abuse
Regulation, UK Listing Rules and the Disclosure Guidance and Transparency
Rules of the Financial Conduct Authority ('FCA')).
By their nature, all forward-looking statements involve risk and uncertainty
because they relate to future events and circumstances that are beyond the
control of the Group and depend upon circumstances that may or may not occur
in the future that could cause actual results or events to differ materially
from those expressed or implied by the forward-looking statements. There are
also a number of factors that could cause actual future financial conditions,
business performance, results or developments to differ materially from the
plans, goals and expectations expressed or implied by these forward-looking
statements and forecasts. As a result, you are cautioned not to place reliance
on such forward-looking statements as a prediction of actual results or
otherwise.
These factors include, but are not limited to: material impacts related to
foreign exchange fluctuations; macro-economic activity; the impact of
outbreaks, epidemics or pandemics, such as the Covid pandemic and ongoing
challenges and uncertainties posed by the Covid pandemic for businesses and
governments around the world, including the duration, spread and any
recurrence of the Covid pandemic and the extent of the impact of the Covid
pandemic on overall demand for the Group's services and products; potential
changes in dividend policy; changes in government policy and regulation
(including the monetary, interest rate and other policies of central banks and
other regulatory authorities in the principal markets in which the Group
operates) and the consequences thereof (including, without limitation, actions
taken as a result of the Covid pandemic); actions by the Group's competitors
or counterparties; third party, fraud and reputational risks inherent in its
operations; the UK's exit from the EU; unstable economic conditions and market
volatility, including currency fluctuations; the risk of a global economic
downturn; technological changes and risks to the security of IT and
operational infrastructure, systems, data and information resulting from
increased threat of cyber and other attacks; general changes in government
policy that may significantly influence investor decisions (including, without
limitation, actions taken in support of managing and mitigating climate change
and in supporting the global transition to net zero carbon emissions);
societal shifts in customer financing and investment needs; and other risks
inherent to the industries in which the Group operates.
Nothing in this preliminary announcement should be construed as a profit
forecast.
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