REG - Paragon Banking Grp - Half-year Results
14/06/2022 07:00
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RNS Number : 7228O Paragon Banking Group PLC 14 June 2022
Paragon Banking Group PLC
Under Stock Exchange embargo until 7.00 a.m. Tuesday 14 June 2022
Volume and margin growth deliver record profits
Paragon Banking Group PLC ('Paragon' or 'the Group'), the specialist banking
group, today announces its half-year results for the six months ended 31 March
2022.
Nigel Terrington, Chief Executive of Paragon said:
"These excellent results demonstrate the considerable progress we have made in
fulfilling our strategic ambitions. Strong growth in new lending at attractive
margins has supported the Group's earnings and return on tangible equity
progression while capital levels remain comfortably in excess of our
regulatory requirements, providing the foundation for further growth and
additional capital returns in the future. Whilst the UK economy faces
headwinds, we have a high quality loan book and we are confident in our
momentum, and have upgraded our guidance for the full year.
Good progress has been made in delivering our multi-year digitalisation plans,
which will enhance customer experience and drive greater operational
efficiency over time.
Given the Group's strong profit performance and capital position we have
extended this year's share buy-back by an additional £25 million."
Financial highlights:
· Underlying profits increased 27.3% to £105.5 million (2021 H1:
£82.9 million)*
· Statutory profit before tax up 49.0% at £143.6 million (2021 H1:
£96.4 million)
· Structural NIM enhancement to 2.57% accelerated by rate environment
(2021 H1: 2.32%)
· Cost:income ratio reduced to 41.2% (2021 H1: 42.5%)
· Underlying EPS increased 29.4% to 32.6 pence (2021 H1: 25.2 pence)*,
while statutory EPS increased 51.5% to 44.4 pence (2021 H1: 29.3 pence)
· Capital base remains strong - CET1 15.4% (31 March 2021: 16.0%)
· Underlying RoTE 14.9% (2021 H1: 12.8%)*
· Interim dividend up 30.6% at 9.4p (2021 H1: 7.2p), in line with
policy
Operational highlights:
· New lending levels up 32.2% from 2021 H1 to £1.49 billion (2021 H1:
£1.13 billion)
· Strong new business pipelines support momentum into the second half:
o Buy-to-let pipeline up 44.4% from March 2021 at £1.34 billion
o Development finance pipeline and undrawn commitments up 30.7% from March
2021 at £0.80 billion
· Retail savings deposits up 14.2% to £9.9 billion (2021 H1: £8.6
billion)
· Good progress in multi-business cloud-based digital re-platforming
programme
· Platinum Investors in People status achieved, held by only 3% of
employers assessed
Guidance summary:
2022 FY metric Original guidance Updated guidance
Mortgage Lending advances £1.7bn+ Increase to £1.8bn +
Commercial Lending advances £1.1bn+ Increase to £1.2bn +
NIM expansion 5bp+ Increase to 20bp+
Operating expenses Low £150ms Unchanged
Buy-back Up to £50m Increase to up to £75m
* For underlying basis, see Appendix A
For further information, please contact:
Paragon Banking Group PLC
Nigel Terrington, Chief Executive
Richard Woodman, Chief Financial Officer
Tel: 0121 712 2000
Headland
Lucy Legh - 0778 857 7637
Del Jones - 0789 407 7816
The Group will be holding a results presentation for sell-side analysts on
Tuesday 14 June 2022 at 9:30am at UBS, 5 Broadgate, London EC2M 2QS. A webcast
replay will be available on the Group's website from 2:00pm that day. The
presentation material will be available on its website at
www.paragonbankinggroup.co.uk/investors 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.
Paragon Banking Group PLC
Interim Management Report
1 OVERVIEW
In the first six months of its 2022 financial year the Group has continued to
deliver on its strategic priorities, leveraging its strong capital base and
increasingly digital footprint to drive sustainable growth and
diversification.
The Group's buy-to-let mortgage operation saw activity exceed pre-Covid levels
with landlord confidence remaining high, despite growing uncertainties in the
UK economy, while research carried out for the Group highlighted the
continuing importance of the private rented sector to housing provision in the
UK. The new business pipeline ended the period at a record level, customer
retention levels were strong and green lending continued to grow.
Commercial Lending saw continued growth in the development finance operation,
with an increasing focus on greener projects and a new core banking model
replacing existing platforms. SME lending operations remained solid, with the
benefits of the rollout of new technology offset by increasing economic
caution amongst UK SMEs. The Group's motor finance arm launched products
across the specialist battery electric vehicle market, helping to support this
rapidly growing market.
On 8 June 2022, after the end of the reporting period, the Group disposed of
the remaining unsecured loan assets within its Idem Capital division at a
small profit, significantly reducing the assets of that segment.
The post-Covid performance of the Group's loan books remains encouraging, with
little evidence of credit issues as the direct impact of UK government support
schemes recedes. The Group, however, remains cautious in its assessment of
future credit losses, with the prospects of UK interest rates and inflation
reaching levels not seen for many years generating uncertainty on likely
credit impacts.
The Group's retail savings offering continues to form the backbone of its
funding strategy, with a strong performance in the first six months which saw
the deposit book increasing by 5.9%. Funding costs continue to be closely
managed in a competitive environment.
Digitalisation of the Group's key business lines continued apace. Cloud-based
technology, designed to improve the experience of our customers, our business
partners and our people, has either been rolled out, or is in the late stages
of testing, increasing access to open banking application programme interfaces
('API's) in SME lending, development finance and the mortgage business.
Further improvements are in the pipeline.
The Group's focus on the development of its employees was recognised in the
period with the award of Platinum Investors in People status, the highest
grading, held only by 3% of the over 50,000 companies assessed. This focus on
people and culture is fundamental to the Group's strategy.
Overall this performance generated a substantial increase in profitability at
both the statutory and the underlying level, which excludes the effect of fair
value gains which will reverse over time. NIM was enhanced, costs were
controlled, and new impairment provisions were minimal.
The Group's regulatory capital and liquidity both remained well in excess of
regulatory requirements and are more than sufficient to meet the requirements
of the Group's strategy. This has enabled the Board to declare an interim
dividend of 9.4 pence per share in line with policy, and also to increase the
current £50.0 million share buy-back programme to £75.0 million. Since 2015
the Group has declared £339.5 million of dividends, supplemented by £335.2
million of share buy-backs.
Overall the result for the half year has been exceptionally strong and,
although the UK economic outlook may not be as positive as might have been
expected six months ago, the Group's prudential strength, high quality loan
portfolio and highly resilient and developing technology platforms leave it
well placed to face any potential challenges ahead, while building its
sustainability credentials.
2 BUSINESS REVIEW
The Group's operations are organised into three divisions, based on product
types, origination and servicing capabilities. Customer loan balances at 31
March 2022 and advances in the period for each of those divisions are
summarised below:
Advances Loans to customers
in the period
at the period end
Six months ended Six months ended Year
ended
31 March 31 March 30 September 31 March 31 March 30 September
2021
2021
2022 2021 2022 2021
£m £m £m £m £m £m
Mortgage Lending 855.3 724.6 1,630.0 11,999.2 11,130.6 11,608.7
Commercial Lending 634.2 401.7 971.5 1,719.7 1,427.1 1,568.8
Idem Capital - - - 196.0 258.6 225.2
1,489.5 1,126.3 2,601.5 13,914.9 12,816.3 13,402.7
The half year period has seen a 3.8% growth in the total loan book with an
8.6% year-on-year increase. Excluding legacy first and second mortgage
balances the portfolio grew by 17.2%, year-on-year.
2.1 MORTGAGE LENDING
The Group's Mortgage Lending division principally provides buy-to-let
mortgages secured on UK residential property to specialist landlords. The
Group has a wealth of experience in this market, built up over more than a
quarter of a century, giving it an unparalleled understanding of both this
form of mortgage and the landlord customer base it targets.
During the period the Group also offered loans to non-specialist landlords and
limited numbers of owner-occupied first charge mortgages on residential
property. However, these form a minor part of its operations. 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 lenders and other specialists.
Housing and mortgage market
The UK housing market has continued its strength of recent years through the
first six months of the financial year. An increase in the demand for housing
and a structural lack of supply means that, house prices have continued
upwards, although in the face of lower levels of residential mortgage
transactions than seen in previous periods.
House prices continued their post-Covid pattern of strong increases, with the
Nationwide House Price Index recording a year-on-year improvement of 14.3% to
March 2022, 6.7% in the six month period. Research by Nationwide attributes
the continuing increases to supply side issues, with the number of people
seeking to move exceeding the number of properties becoming available.
Mortgage approvals reported by the Bank of England were broadly similar to
those in the first half of the 2021 financial year. £154.2 billion of new
mortgages were approved in the period, compared to £157.7 billion a year
earlier. However, the proportion of remortgages increased significantly,
representing 37.7% of approvals in the first half of 2022 against 24.9% in the
comparable period in 2021, reflecting the fall in house purchase activity.
Across the mortgage market, arrears and possessions reported by UK Finance
('UKF') remained at low levels, with the numbers of customers in arrears
reducing in the first quarter of the calendar year. Whilst possessions had
increased, this included an element of catch-up following the moratorium
during the omicron outbreak. Based on its research, published in May 2022, UKF
has concluded, despite potentially adverse economic headwinds, the position on
mortgage performance remains positive, with the number of households in
arrears 10% less than a year previously and also less than before the outbreak
of the pandemic.
The Private Rented Sector ('PRS') and the buy-to-let mortgage market
The Group's target customers in the buy-to-let sector are specialist
landlords. Such landlords will typically let out four or more properties, or
operate with more complex properties, and will generally run their portfolio
as a business and have both a strong understanding of their local lettings
market and a high level of personal day-to-day involvement. The Group is
amongst a small number of specialist lenders addressing this sector, which is
underserved by many of the larger lenders.
The Group considers that this level of experience, the level of the customer's
involvement in day-to-day letting activities and the diversification of their
income streams across properties make them less vulnerable to cash flow shocks
in the event of a downturn and therefore better able to cope when faced with
an adverse economic situation.
The PRS continues to provide homes for around 19% of UK households. With
supply and pricing issues impacting first-time buyers and the potential for
incomes to become more constrained, the sector will continue to be crucial in
national housing provision.
The Group has commissioned research on the future of the sector with the
Social Market Foundation. This exercise found that, contrary to some widely
held beliefs, most people renting their home in the private rented sector are
happy with both their property and their landlord, and value the flexibility
renting offers to them.
The research also concluded that the attention of policy makers, the media and
society more generally, focuses on the minority of PRS tenants who have had
particularly bad experiences with renting. However 81% of private renters
expressed their contentment with their current property, and 85% say they are
satisfied with their landlord.
The full report on this research - "Where Next for the Private Rented Sector?"
- is available on the Group's website at www.paragonbankinggroup.co.uk.
Volumes of new buy-to-let mortgages followed the trend in the wider mortgage
market, responding to the property market as a whole. New advances reported by
UKF, at £23.4 billion for the six months ended 31 March 2022, were broadly
similar to those for the previous half year (2021 H2: £23.6 billion), but
with a much increased level of remortgage activity. Remortgages comprised
66.2% of new mortgage activity, compared to 55.9% in the six months ended 30
September 2021.
For rental property, RICS, in its March 2022 UK Residential Market Survey,
reports increasing levels of tenant demand, putting upward pressure on rents,
with an expectation of rents increasing by 4% in the coming year and average
increases of 5% per annum over the next five years. This is supported by
research from Propertymark, in its March 2022 survey, where 71% of members
reported increasing rents. This strength in the market should support both
cash flows and affordability for landlord customers, even in the face of
interest rate increases and other inflationary pressures.
These national trends are supported by research carried out with the Group's
customers and mortgage brokers in the first months of 2022. 62% of landlords
reported increased tenant demand, the highest figure reported to date in the
Group's research. Landlords also reported rising rents and growing portfolios.
Mortgage intermediaries reported brisk business, with over half operating at
or near capacity. Looking forward, strong demand for remortgage products was
predicted and over a third of intermediaries had already facilitated green
products. Intermediary net confidence for the future of the mortgage market in
general was +85%, with confidence in the buy-to-let market at +67%.
The UKF analysis of arrears and possessions published in May 2022 provided
analysis of buy-to‑let cases, showing a similar picture to the wider
mortgage market, with arrears remaining low and the number of arrears cases 5%
less than a year earlier.
Overall, current research shows the buy-to-let market in a healthy state,
notwithstanding any longer-term impacts of the pandemic, or other, more recent
economic issues.
Mortgage Lending activity
The primary focus of the Group's Mortgage Lending division continues to be the
provision of buy-to-let mortgages to specialist landlord customers. The total
amounts of the division's lending in the six month period are set out below.
Six months ended 31 March Six months ended 31 March Year
2022
2021
ended 30 September 2021
£m £m £m
Specialist buy-to-let 838.8 686.2 1,562.2
Simple buy-to-let 15.8 28.7 52.2
Total buy-to-let 854.6 714.9 1,614.4
Owner-occupied 0.7 1.0 1.5
Second charge - 8.7 14.1
855.3 724.6 1,630.0
Total lending in the segment increased by 18.0% compared to the same period in
the previous financial year, continuing the strong performance seen towards
the end of the 2021 financial year.
Buy-to-let
Overall buy-to-let lending continued to increase, building on the momentum
established in the second half of 2021. Total completions in the six months
were 19.5% higher than in the first half of the 2021 financial year with
specialist business up by 22.2%. The pipeline of new business at the period
end had increased to £1,337.8 million, 44.4% higher than a year earlier (30
September 2021: £1,008.1 million, 31 March 2021: £926.7 million).
Restrictions in lending imposed during the pandemic had all been reversed by
the end of the period, with further developments introduced, helping to drive
volumes.
The majority of the Group's mortgage lending products offer fixed rates for an
initial period, with many customers choosing a new product, either with the
Group or elsewhere, at the end of this fixed period. A market shift in 2017
saw five-year fixes become the dominant product and the first tranche of that
lending is now coming to the end of the five-year period. The Group has well
established retention procedures to address accounts as their fixed rates
expire and, in common with the wider market, has also seen a marked shift in
new business flows in favour of remortgages. This is in contrast to the
emphasis on house purchases seen during 2021, which was partly driven by stamp
duty incentives, since withdrawn.
Specialist intermediaries are the principal source of the Group's buy-to-let
business, and it continues to develop its service proposition to ensure its
business partners receive the service levels that they deserve. The Group
continues to monitor satisfaction levels amongst its brokers, with 66% of
those surveyed in the period saying that the Group provided better service
than other lenders (2021 H1: 66% ,2021 FY: 66%).
This research also showed that 89% of brokers were satisfied with the ease of
obtaining a response from the Group (2021 H1: 88%, 2021 FY: 91%), delivering a
net promoter score at offer stage of +36 (2021 H1: +46, 2021 FY: +43). The
Group was also named 'Best Professional Buy-to-Let Mortgage Lender' at the
2021/22 Your Mortgage Awards, further underlining its customer
service credentials.
The Group's long-term programme of reengineering its mortgage business
continued through the period. This includes a thorough review of all systems
and operational processes to align them with the Group's strategy for the
division and the overarching plan of digitalising the business. Initially,
particular focus has been on those areas which can deliver immediate impact,
such as customer retention, and on enhancing service to mortgage brokers.
Improvements which went live in the period are already playing an important
role in managing retention risk as five-year fixed rate mortgages start to
mature.
The Group continues to expand its range of green buy-to-let mortgages. These
products have a maximum 80% loan-to-value ratio and offer lower interest rates
for energy efficient properties with Energy Performance Certificate ('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 selected 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.
The Group's new lending volumes on green buy-to-let products in the six months
ended 31 March 2022, which increased by 38.4% compared to the same period in
2021, are set out below.
2022 H1 2021 H1 2021 FY
£m £m £m
EPC rated A or B 78.4 64.4 134.3
EPC rated C 274.6 190.7 443.4
Total rated A to C 353.0 255.1 577.7
Coverage (England and Wales) 99% 91% 93%
The Group's latest analysis identified EPC grades for 90.8% of its mortgage
book by value at 31 March 2022 (31 March 2021: 87.6%, 30 September 2021:
88.3%). Of these 98.7% were graded E or higher (31 March 2021: 98.0%, 30
September 2021: 98.4%) with 38.2% rated A, B or C (31 March 2021: 36.8%, 30
September 2021: 37.6%). This steady improvement results from the new lending
described above, with 43.2% of new originations in the year having one of the
top three grades (99% coverage).
While the Group monitors EPC performance it is also conscious of the need to
avoid unintended consequences by focussing lending solely on this. Although
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 31 March 2022, 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 (31 March 2021: 2.3%, 30
September 2021: 2.5%).
In addition, a more detailed analysis was carried out in the period, using
data which was more location specific, and also included risk of flooding from
surface water. This showed 3.2% of properties securing buy-to-let mortgages
were at higher risk.
The business is currently working to develop products to support existing
customers to make their properties more energy efficient. Given that the
majority of properties in the PRS require some form of upgrade to meet the
Government targets, this kind of support will be vital to achieving net zero.
Other lending
The Group makes only a limited number of owner-occupied mortgage loans,
normally as an extension of its relationship with its professional landlord
customers. Mass-market mortgage lending does not currently offer the levels of
return on capital which would be attractive to the Group. The Group no longer
offers second charge mortgages, and all its second charge mortgage books are
currently in run‑off.
Performance
The outstanding first and second charge mortgage balances in the segment at 31
March 2022 are set out below, analysed by business line.
31 March 31 March 30 September 2021
2022 2021
£m £m £m
Post-2010 assets
Buy-to-let 7,992.8 6,702.9 7,379.0
Owner-occupied 31.3 42.0 35.6
Second charge 124.5 168.6 148.1
8,148.6 6,913.5 7,562.7
Legacy assets
Buy-to-let 3,850.6 4,216.1 4,045.3
Owner-occupied - 1.0 0.7
11,999.2 11,130.6 11,608.7
Balances within the mortgage portfolio have continued to increase steadily, a
result of lending volumes and successfully retaining existing customers. At 31
March 2022 loan balances in the division were 7.8% higher than a year earlier.
Within this balance, the overall buy-to‑let portfolio increased 8.5%
year-on-year to £11,843.4 million (30 September 2021: £11,424.3 million, 31
March 2021: £10,919.0 million), with post-2010 originated assets representing
67.5% of the total at the end of the period (31 March 2021: 61.4%).
Despite the levels of activity in the mortgage market, the annualised
redemption rate on buy-to-let mortgage assets remained stable in the six
months to 31 March 2022 at 6.9% (2021 H1: 6.8%, 2021 FY: 6.9%). As the first
wave of five-year fixed term mortgage accounts, a product not widely available
before 2017, have begun to mature, the Group has put significant effort into
managing these customers and ensuring that, as far as possible, an appropriate
new product is made available to them. The increase in the scale of product
maturities may, however, see higher absolute redemption levels going forward
despite the strong retention performance.
Arrears on the buy-to-let book remained low and broadly stable in the six
months at 0.15% (30 September 2021: 0.21%, 31 March 2021: 0.22%). The Group's
buy-to-let arrears remain very low compared to performance in the national
buy-to-let market, as they have been through the life of the product. In
comparison, UKF reported arrears of 0.46% across the buy-to-let sector at 31
March 2022 (30 September 2021: 0.47%, 31 March 2021: 0.57%), highlighting
the Group's asset quality.
The performance metrics of the buy-to-let portfolio have remained generally
strong across the period, despite the economic headwinds generated first by
Covid, and then by growing uncertainties in the UK economy. However, the
extent to which underlying issues have yet to manifest themselves remains
uncertain. No payment holidays were given on mortgage accounts in the period,
but while there is no evidence of accounts previously given such holidays
performing differently on average to other accounts, there is evidence of more
erratic payment profiles, particularly for those who were granted extended
relief. The Group therefore continues to monitor these accounts closely.
The Group's approach focusses its underwriting on the credit quality and
financial capability of its customers, underpinned by its assessment of the
available security. It relies on a detailed and thorough assessment of the
value and suitability of the property as security, including the use of a
specialist in-house valuation team covering the whole country, and this robust
approach to valuation, not just at inception, but through the life of the
loan, provides it with significant security even in times of economic stress.
The loan-to-value coverage in the Group's buy-to-let book, at 59.2% (30
September 2021: 61.2%, 31 March 2021: 64.4%) is at the lowest level seen in
over a decade, as a result of increasing house prices, which have continued to
grow despite Covid. The resilience and value of the collateral underlying the
Group's buy-to-let mortgage book, alongside its careful approach to
provisioning underpins the strength of the Group balance sheet, and is
subjected to a systematic programme of stress testing. The levels of interest
cover and stressed affordability in the portfolio suggest that its customers
are also well placed to manage Covid-related and other economic impacts on
their businesses in the longer-term.
Second charge mortgage arrears increased marginally to 1.50% (31 March 2021:
1.00%, 30 September 2021: 1.18%) as the book continued to season, with
performance remaining satisfactory. These metrics remain significantly better
than those for the second mortgage market as a whole, reported by the Finance
and Leasing Association ('FLA').
The Group continues to operate a receiver of rent process for buy-to-let
assets, which helps to reduce the level of loss incurred by both it and, in
turn, its landlord customers. This process gives the Group direct access to
the rental flows from the underlying properties, while allowing tenants to
stay in their homes. At 31 March 2022, 558 properties were managed by a
receiver on the customer's behalf, broadly stable year-on-year (31 March 2021:
557 properties). Almost all the current receivership arrangements relate to
pre-2010 lending, with cases being resolved on a long-term basis to ensure the
best outcome for the Group, its customers and their tenants. There were
relatively low numbers of cases entering receivership in the period.
Outlook
The mortgage business is well placed to continue to develop into the future.
It has the capacity and the systems to continue to deliver the service which
brokers and customers require, and to support landlord customers and the PRS
going forward.
2.2 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. The growth of this division represents a major strategic focus for the
Group in the post-Covid environment.
The four major strands of the business comprise:
· 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 market
Within these sectors the Group's strategy is to target niches (either product
types or customer groups) where its operating model and capital deployment can
combine to optimise the relationship between growth and risk, to deliver
long-term sustainable returns.
In each of its markets the division's competitors are principally small banks
and similarly sized lenders. They are markets in which the largest lenders
have little presence, reducing credit availability for customers and creating
significant opportunities for the Group. The division operates through
specialist teams in each business area, with a common focus on credit
standards, customer service, asset appraisal, and collections and recovery
linking the operations strategically.
The SME sector was a particular target of UK Government support during the
Covid pandemic, resulting in an increase in cash reserves held in businesses
across the sector. This makes it difficult to gauge the extent of
Covid-related scarring and the future trajectory of the sector. This is
complicated further by recent economic developments with increasing borrowing
costs, inflationary pressures and supply chain issues all having potential
impacts going forward. The requirement for SMEs to start repaying loans made
under the Coronavirus Business Interruption Loan Scheme ('CBILS') and other
government-backed loans also has the potential to impact investment appetites.
The Group's ongoing project to enhance digital capabilities across the
division has continued in the period, with major investment in both its
development finance and SME lending platforms. The Group's agile approach to
development has resulted in a number of enhancements going live, including a
new broker portal for SME lending, which provides a more streamlined and
effective process for business providers, while improving operational
efficiency by providing the capability for increased process automation.
The division continues to expand its green initiatives with the motor finance
operation launching its electric vehicle proposition in the period and the
development finance business incentivising developers to provide more
energy-efficient properties. At the same time the division continues to
support local authorities in 'greening' their refuse collection operations,
with the first contracts signed during the period.
Commercial Lending activity
New business in the sector increased by 57.9%, compared to the same period in
2021, as the UK economy continued to emerge from Covid, with growth across all
the division's business lines. Growth compared to the first half of 2021 was
particularly marked in motor finance and parts of the SME lending business,
where market transactions in the first half of 2021 had been at historically
low levels.
New business increased by 11.3% compared with the second half of 2021, where
the impact of lockdowns had started to recede, with strong growth in the
development finance operation, but a flatter position in SME lending, as the
growth in asset leasing and loans to professionals was offset by the decline
in CBILS and Recovery Loan Scheme ('RLS') lending.
The new lending activity in the segment during the period 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
below.
Six months Six months Year
ended
ended
ended
31 March 31 March
2022
2021 30 September 2021
£m £m £m
Development finance 323.7 229.5 510.4
SME lending 181.8 155.5 336.9
Structured lending 53.0 (12.1) 24.0
Motor finance 75.7 28.8 100.2
634.2 401.7 971.5
These advances increased the Commercial Lending loan book by 9.6% in the six
months, to a total of £1,719.7 million (31 March 2021: £1,427.1 million, 30
September 2021: £1,568.8 million). This is 15.1% larger than the division's
£1,494.3 million portfolio at 31 March 2020, before the impact of
the pandemic.
Development finance
The growth of the Group's development finance operation had continued
throughout the pandemic, laying the foundations for a positive performance in
the period, with advances increasing 41.0% compared to the first six months on
the 2021 financial year. The UK continues to provide fewer new homes than
government forecasts suggest are necessary, offering significant opportunities
for the Group's customer base.
The business has now launched its first major green finance option. Projects
developing energy-efficient properties, those with an EPC A grade, can receive
beneficial funding terms. By 31 March 2022, £23.5 million of new lending
facilities had been agreed under the green initiative, with drawings
commencing in the period. With a developing pipeline, this will be an area of
focus for the Group going forward, as developers increasingly factor these
discounts into their project planning.
The regional spread of the Group's lending has broadened, with the proportion
of the portfolio located in London and the South-East of England falling to
58.2% from 63.6% at 30 September 2021. Activity increased particularly in the
East and West Midlands, with funding provided for a number of flagship
projects. The business has also increased the range of specialist developments
it has funded, including a heightened focus on the later living sector.
The short-term prospects for future lending in the business remain strong.
Undrawn balances on current facilities had increased to £596.4 million, a
significant amount of which would be expected to be drawn in the second half
of the financial year (31 March 2021: £402.0 million, 30 September 2021:
£500.4 million). The new business pipeline stood at £266.7 million (31 March
2021: £318.4 million, 30 September 2021 £366.6 million), with the reduction
partly attributable to projects delayed by supply chain issues.
The Group's investment in systems for this business has continued through this
period, with enhancements being delivered on a regular basis to improve
process efficiency and customer service. This drive towards digitalisation
will continue, providing a solid platform for the growth of the business and
supporting the transition to an internal ratings based approach to capital
management.
The current state of the UK house building market gives a significant
opportunity for smaller developers to expand and for the Group to support
them. The Group's proposition is strong and attractive and continues to
provide healthy returns for the capital invested and opportunities
for growth.
SME lending
Compared to the first six months of 2021 new lending in the SME lending
business grew by 16.9%. Growth compared to the second half of 2021, after
lockdowns had mostly ended, was more modest at 0.2%, but this result includes
significantly different performances across product types. In particular,
lending backed by Covid-related government guarantees formed a far smaller
part of the business' activity in the period. Generally SME businesses have
remained cautious on their investment decisions, given the economic
uncertainties in the current UK environment, constraining all capital goods
related activity.
In the asset leasing business volumes excluding government backed loans, at
£90.3 million, were broadly similar to the £91.3 million achieved in the
second half of the 2021 financial year (2021 H1: £106.9 million, 2021 FY:
£198.2 million). This reflects overall market pressures in the asset finance
market with the FLA reporting new business, excluding cars and high value
items, in the six months to 31 March 2022 4.1% lower than in the previous six
months. The FLA's regular survey of members, carried out in the first quarter
of 2022 attributed this partly to supply issues affecting the availability of
new equipment for leasing. Investment in operating leases has also continued
with £9.7 million of assets being acquired (2021 H1: £4.6 million, 2021 FY:
£13.0 million).
The Group continued to provide loans under the UK Government-sponsored British
Business Bank's RLS programme to support SMEs potentially affected by the
Covid pandemic. Initially these loans had the benefit of an 80% government
guarantee (after the proceeds of any business assets are applied for leasing
balances), but after 31 December 2021, this was reduced to 70%. The reduction
in the guarantee and the general emergence from Covid saw take-up of the new
scheme drop off markedly. However, the Group expects to offer these loans to
SME customers until the scheme closes. The Group's lending in this area has
been primarily focussed on its existing customers, with the majority of its
lending on asset-secured products.
The first half of 2022 saw £23.8 million advanced under schemes backed by
government guarantees (2021 H1: £26.3 million, 2021 FY: £64.2 million), of
which £23.3 million was asset leasing business. The Group continues to
closely monitor the portfolio for any adverse indications, particularly as
the majority of CBILS and Bounce Back Loan Scheme ('BBLS') customers are now
obliged to meet their own interest payments, rather than having them met by
the UK Government.
Short-term lending to professional services firms outside the government
supported schemes reached £57.1 million in the period, double that in the
comparable period in 2021 and 71.0% up on the second half of 2021 (2021 H1:
£28.6 million, 2021 FY: £62.0 million). These loans are often used to spread
the impact of tax payments, and the availability of tax deferrals, together
with the availability of CBILS and similar loans amongst this customer group
had seriously depressed demand. However the underlying requirement for this
form of finance remains for the longer-term, and performance has continued to
move back towards pre-Covid levels.
The division is seeing more green lending propositions over recent months,
with many businesses in the transportation field and beyond seeking to reduce
their carbon footprints. The division also has a strong presence in waste
management, supporting local authorities as they transition to greener refuse
collection activities and providing funding for the development of recycling
plants. It is a strategic priority of the Group to support UK SMEs, whose
journey towards net zero may require significant capital investment over time,
and these types of initiatives are expected to increase going forward.
The Group's investment in the technology of its SME lending systems has
continued to make significant improvements in internal efficiency and service
to brokers and customers. Agile and modular delivery enables individual
improvements to go into the live system as they are completed, providing
incremental enhancements, rather than waiting for a complex 'big bang'.
At the beginning of the period a new broker portal was rolled out. This was
developed based on extensive research amongst the broker community and enables
brokers to upload applications and receive rapid feedback on the progress of
the potential loan. Take-up has been good with over 60% of standard SME
lending applications now being received through the portal. Importantly, this
interface is designed as an additional service to brokers, and the division's
business support team remains fundamental to ensuring brokers and customers
receive the standard of service they deserve.
While the FLA Outlook Survey for the first quarter of the calendar year,
conducted in January 2022, presents a more nuanced view of the outlook for the
leasing industry than in some recent surveys, with concerns raised about
inflation, consumer spending, funding costs and a potential resurgence of
Covid, respondents expected the economic position to improve in the
longer-term. 86% of firms were expecting lending volumes to increase over a
twelve month horizon, with 55% expecting increases of over 10%.
It is clear that the SME lending market continues to offer good growth
prospects to a lender which can provide an efficient, streamlined offering
focussed on customers and their advisers and the Group continues to focus on
meeting that requirement.
Structured lending
Activity in the structured lending business stream has continued its process
of post-Covid normalisation. Drawings generally increased and a further
facility came on stream, taking the drawn balance to £171.7 million at the
end of March. This is the operation's thirteenth facility to date, with five
having paid down, and with no losses incurred.
These 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. This business line is important both as a direct
source of lending, but also as a way to explore new markets and routes to
market.
The Group has a number of further facilities in the pipeline, broadening the
range of products and industries supported. As each of these arrangements is
constructed on a bespoke basis, the throughput of the pipeline tends to be
slower than for other products, and hence the post-Covid bounce-back cannot be
as rapid.
Motor finance
During the first half of the 2021 financial year the Group's motor finance
operation was largely suspended, a response to the low levels of automotive
transactions through the initial Covid lockdown periods. The business was
relaunched in the spring of 2021, and has rebounded significantly since that
time. The £75.7 million advanced in the period is over twice the amount
loaned in the comparative period in 2021, and 6.0% greater than the value in
the second half of 2021 (2021 H1: £28.8 million, 2021 FY: £100.2 million),
despite growing economic uncertainties and inflationary pressures
impacting consumers.
The half year saw the Group's first loans on static caravans, a product which
delivers strong yields and capacity for expansion and fits with the Group's
specialist vision for the business.
The Group also launched its first products for financing battery-powered
electric vehicles. £2.7 million of such loans were made, reflecting the
recent growth in availability of such vehicles, with the pipeline building
significantly as the half year closed. The Group is therefore well placed to
support the green aspirations of its customers, as electric vehicles become a
more widely viable and popular option.
Performance
The loans within the Commercial Lending division, analysed by product type are
set out below.
31 March 31 March 30 September 2021
2022 2021
£m £m £m
Asset leasing 457.0 467.8 468.7
Professions finance 49.5 27.9 33.1
CBILS, BBLS and RLS 94.3 50.1 83.8
Invoice finance 24.1 14.3 20.9
Unsecured business lending 14.0 11.7 10.3
Total SME lending 638.9 571.8 616.8
Development finance 672.9 552.3 608.2
Structured lending 171.7 82.6 118.9
Motor finance 236.2 220.4 224.9
1,719.7 1,427.1 1,568.8
The size of the Commercial Lending book increased by 9.6% in the six months,
as activity amongst the Group's SME customer base began to increase following
the pandemic.
Credit quality in the development finance book remained excellent. Accounts
are regularly monitored for project progress and credit quality and graded on
a case-by-case basis by the Credit Risk function. At 31 March 2022 only three
accounts were identified as at risk of loss. The average loan to gross
development value for the portfolio at the period end, a measure of security
cover, was 62.1% (30 September 2021: 61.7%, 31 March 2021: 62.4%). This gives
the Group a significant credit buffer if any of the projects encounter issues.
No write-offs were recognised in the period.
Arrears in the division's finance leasing portfolios remain stable, even with
the cessation of the majority of payment reliefs. Arrears on asset leasing
business at 31 March 2022 stood at 0.21% (30 September 2021: 0.27%, 31 March
2021: 0.86%) and those on the motor finance book at 2.20% (30 September 2021:
2.30%, 31 March 2021: 2.25%). Write-offs in SME Lending were limited to a
small number of cases where special conditions applied, and which had been
provided for at 30 September 2021.
Whilst some lenders have reported issues with their CBILS, BBLS and RLS
lending related to either credit quality or fraud, the Group is yet to see any
significant impacts, even though the majority of customers are now in a
position where they have to fund repayments, rather than these being met by
the UK Government. The portfolio at 31 March 2022 contained only £1.4 million
Stage 2 accounts at gross carrying value and only £0.4 million of credit
impaired cases. The Group has so far had to make claims on £1.8 million of
loans, out of the £113.9 million advanced since the schemes began. The
majority of the Group's government-backed lending was to its existing
customers, which contributed to the credit quality of this lending.
For structured lending accounts, the Group carefully monitors the performance
of the underlying asset pool on a monthly basis, to ensure its security is
adequate. Performance in the half year has been in line with expectations,
with a number of facilities showing improved metrics. Of the two facilities
assigned to IFRS 9 Stage 2 at 30 September 2021, one had returned to Stage 1,
with the other redeeming at par.
Outlook
Overall the prospects for the Commercial Lending division appear strong,
underpinning the Group's diversification strategy. While economic uncertainty
is growing, the Group's positioning and sector exposures, coupled with its use
of enhanced technology, mean it is well placed to support the aspirations of
its customers in the coming periods.
2.3 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 Group regards the operation as
essentially opportunistic, with portfolios acquired only where these fit
within its existing capabilities and operations and where the projected return
is attractive in comparison to the other opportunities for the deployment of
its capital.
After the period end the Group sold the majority of its unsecured portfolios,
considerably reducing the size of the Idem Capital division. As a result it is
considering whether it is appropriate to report Idem Capital as a separate
segment in future. However it will still consider portfolio acquisitions where
these meet its strategic requirements.
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, which are also considered carefully in any asset disposals.
The implementation of the new FCA Consumer Duty in the Group's relationships
with all its customers, particularly those who may be vulnerable, is a
strategic priority for the division, particularly in light of the mounting
financial pressures on UK households.
New business
The UK market for loan portfolio sales in the period remained restrained, with
bidding highly competitive for those loan books coming to market. The Group
considered a number of opportunities in the mortgage finance, consumer lending
and asset finance spaces, but none of these ultimately met its criteria and
they were not progressed. Therefore, in the six month period, no new portfolio
acquisitions were completed (2021 H1: none).
The main focus of the business throughout the half year was the careful
management of its existing loan portfolios and ensuring that appropriate
processes and systems were in place to address both the longer-term impacts of
the Covid outbreak and the more general impacts of rising living costs on its
customers. This is particularly important where those customers might be
vulnerable or may develop vulnerabilities as a result of the ongoing
situation.
Performance
The values of the loan balances in the segment are set out below, analysed by
business line.
31 March 31 March 30 September 2021
2022
2021
£m £m £m
Second charge mortgage loans 117.4 151.6 133.6
Unsecured consumer loans 76.8 98.1 87.3
Motor finance 1.8 8.9 4.3
196.0 258.6 225.2
With no portfolios acquired in the period, the Idem Capital loan book has
continued to decline in the period as a result of customer collections.
120 month Estimated Remaining Collections on the segment's acquired consumer
assets, which measures forecast undiscounted receipts, reduced to £209.3
million at 31 March 2022 from £260.1 million a year earlier and payment
performance in the segment remained in line with historic experience.
On 8 June 2022, after the end of the period, the Group disposed of unsecured
loan assets with a carrying value of £76.8 million at 31 March 2022. A small
profit is expected to be realised against these assets, which will be
finalised following post-completion procedures and reported with the year
end results.
Arrears on the segment's secured lending business continued to move higher as
overall numbers of cases declined. Arrears cases represented 25.4% of Idem
Capital second charge mortgage assets at 31 March 2022 (30 September 2021:
24.3%, 31 March 2021: 20.2%). However the absolute number of arrears cases
reduced by 6.6% to 2,048 from 2,193 at the start of the period (31 March 2021:
1,945). This shows the increase in percentage arrears to be a result of the
structure of these portfolios, which include accounts which were making full
payments in the period but may have missed payments in the past, remaining in
arrears long-term, and the propensity of fully up-to-date accounts to redeem
more quickly than these long-term arrears cases.
None of the individual Idem Capital purchased loan portfolios were considered
as underperforming in the period. The Group monitors actual cash receipts from
acquired portfolios against those forecast in the evaluation which informed
the purchase price. Up to 31 March 2022, such collections were 109.7% of
those forecast to that point (30 September 2021: 109.8%,
31 March 2021: 110.0%), demonstrating the stability in cash flow from these
portfolios.
The Group continues to invest in its systems and people to ensure that these
loans are serviced efficiently and effectively, and that appropriate customer
outcomes are achieved, particularly for vulnerable customers.
Outlook
The Group continues to view the ability to acquire appropriate loan portfolios
on an opportunistic basis as a useful adjunct to its strategic objectives,
however this is not a primary strategic focus. The disposal of most of the
division's unsecured loan book after the period end will further reduce its
contribution to group profit, but the prospects for the remaining income
streams remain positive.
The Group will continue to ensure that all Idem Capital customers, including
those whose accounts are disposed of, receive appropriate outcomes and fair
treatment.
3 FUNDING REVIEW
The Group's principal source of funding is its retail deposit-taking
operation, but it is able to access a variety of other funding sources,
including central bank funding lines. This ensures that its funding position
is both adaptable and sustainable as the business and its operating
environment change over time. Cost-effective funding can be accessed despite
issues in any particular funding market, and funding for strategic initiatives
sourced on a timely basis.
During the period the Group's deposit book has grown, despite the increasing
normalisation of economic activity and high-profile new entrants to the
market, with additional channels to market also being added. In addition, the
Group's status as a debt issuer was enhanced when its credit rating was
upgraded by Fitch during March 2022.
The Group's funding at 31 March 2022 is summarised below.
31 March 31 March 30 September 2021
2022
2021
£m £m £m
Retail deposit balances 9,853.7 8,631.2 9,300.4
Securitised and warehouse funding 1,348.4 2,767.0 1,246.0
Central bank facilities 2,850.0 2,244.4 2,819.0
Tier-2 and retail bonds 261.3 405.3 386.1
Repurchase agreements - 50.0 -
Total on balance sheet funding 14,313.4 14,097.9 13,751.5
Other off balance sheet liquidity facilities 150.0 150.0 150.0
14,463.4 14,247.9 13,901.5
The Group's funding balance has continued to move towards the retail savings
market in the period, with an increase of 5.9% in retail deposits. At the end
of the period retail deposits represented 68.8% of all on balance sheet
funding (30 September 2021: 67.6%, 31 March 2021: 61.2%).
At 31 March 2022 the proportion of easy access deposits, which are repayable
on demand, was 25.2% of total on-balance sheet funding, similar to the
position at the start of the period (30 September 2021: 24.1%, 31 March 2021:
20.0%). This percentage remains low compared to the rest of the banking sector
and can be expected to rise going forward.
The Group's stance on liquidity remains prudent, with £1,342.5 million of
cash available at 31 March 2022 (30 September 2021: £1,236.5 million, 31
March 2021: £1,895.1 million). The appropriate level of cash reserves
continues to be monitored as part of the Group's capital and liquidity
strategy, which will continue to take a conservative view of the economic
outlook, including the long-term impacts of the pandemic, UK interest rates,
the cost of living and wider geopolitical concerns.
Derivative assets and liabilities continue to be used to hedge interest rate
risk arising from fixed rate loans and deposits. While this strategy has not
materially changed in the period, the movements in interest rate expectations
over the six months, coupled with the increased mortgage pipeline have
resulted in larger swap balances on the balance sheet at 31 March 2022.
However, the Group still undertakes no trading in derivatives.
The Group successfully executed the plans to transition all LIBOR-linked
assets and exposures to alternative rates set out in the 2021 Annual Report
before the cessation of LIBOR in December 2021.
3.1 RETAIL FUNDING
The Group's retail savings operation forms the principal plank of its funding
platform. The UK savings market provides a funding channel which is reliable,
liquid, scalable and cost-effective, with activity little impacted by the
ongoing pandemic.
The main focus of the business has been on offering sterling deposits to UK
households, through a streamlined online presence, supported by an outsourced
administration function, although this has become more diversified over recent
periods. Products offered include cash ISAs, term and notice deposits, and
easy access accounts.
The Group's strategy in the retail deposit market is to generate and retain
customer accounts by providing competitive interest rates, attractive and
innovative products and high quality customer service. The protection provided
to depositors by the Financial Services Compensation Scheme ('FSCS') both
incentivises larger savers to split their deposits, and reduces the perceived
risk for customers in using less familiar institutions, providing market
opportunities for the Group's offering.
During the six months UK household savings balances reported by the Bank of
England continued to increase with balances at 31 March 2022 reaching
£1,424.6 billion, an increase of 1.4% in the period and an increase of 4.4%
year-on-year. The Covid pandemic reduced the levels of discretionary spending
by households, and hence an increase in savings. Some of this increase may be
reversed as the UK economy returns to a more normal footing, potentially
mitigating inflationary pressures to some degree.
The Group's customer deposits continued to increase faster than the overall
market, with a 5.9% increase in balances over the six month period, reflecting
the soundness of the Group's proposition and its continuing programme of
business and systems development. This was achieved despite some high-profile
new entrants to the market, together with high levels of competition,
producing upward pressure on rates.
The Group's savings balances at the period end are analysed below.
Average interest rate Proportion of deposits
31 March 2022 30 September 2021 31 March 2022 30 September 2021
% % % %
Fixed rate deposits 1.26 1.25 58.0 58.8
Variable rate deposits 0.63 0.42 42.0 41.2
All balances 0.99 0.91 100.0 100.0
The increase in funding costs is driven by market movements, where savings
rates have begun to move upwards, following the increase in the Bank of
England base rate, after a period of stability. The average initial term of
fixed rate deposits at 31 March 2022 remained stable at 25 months
(30 September 2021: 26 months), although easy access products have continued
to dominate the savings market, with customers expecting rate increases in the
near term.
During the period the Group broadened its in-house product range with the
launch of its first green savings product, a market-leading three year fixed
rate bond, with the proceeds used to fund buy-to-let mortgages on properties
with EPC levels of C or above. This enables the Group's customers to support
the process of enhancing the sustainability of the UK's housing stock. The
Group aims to build on this green savings initiative going forward.
Offerings through third party channels also provide an increasing part of the
Group's savings base. 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 now has nine such relationships, compared to seven at 30
September 2021. These channels now represent around 14% of the total deposit
base (30 September 2021: 12%) and the Group has the systems and control
framework in place to further increase its reach through these channels,
if appropriate.
The Group's strategy in the savings market relies on providing a high quality
customer offering and conducts insight surveys throughout the customer
journey. The results of this research in the period maintained the strongly
positive position previously reported.
For customers opening a savings account with the Group in the period, 88% of
those who provided data stated that they would 'probably' or 'definitely' take
a second product (2021 H1: 86%, 2021 FY: 88%). The net promoter score for
new customers in the period was +58, an improvement from the +50 achieved in
the first half of the preceding financial year, and in line with 2021's full
year result (2021 H1: +50, 2021 FY: +58), remaining significantly positive.
Of customers with maturing savings balances in the period, 86% stated that
they would 'probably' or 'definitely' consider taking out a replacement
product with the Group (2021 H1: 89%, 2021 FY: 89%) with a net promoter score
at maturity of +50, compared to +52 for the first half of the 2021 financial
year (2021 FY: +52).
These responses show that the quality of the Group's customer interaction
operations position it well to retain customers and deposits in an active and
competitive market.
The Group continues to be successful in industry awards, being named 'Best
Fixed Rate Cash ISA Provider' at the 2022 Moneynet.co.uk awards, an
endorsement of one of the business' key products.
Retail deposits continue to provide a stable foundation for the Group's
funding strategy allowing volumes and rates to be effectively and flexibly
managed. The Group will continue to develop the business on a strategic basis,
expanding its product range, addressing wider demographics and expanding its
presence on third party platforms. It will also continue to develop its
systems to ensure it is able to address the increasingly sophisticated needs
of savers.
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.
3.2 CENTRAL BANK FACILITIES
The Group has access to facilities offered by the Bank of England from time to
time, which it utilises as part of its overall funding strategy.
The largest part of the Group's central bank funding relates to the Bank of
England Term Funding scheme for SMEs ('TFSME'). TFSME closed for new drawings
during the period, but before closure the Group repaid and redrew all its
existing TFSME borrowings, ensuring that this cost-effective funding continues
to be available for as long as possible. The Group's TFSME borrowings at 31
March 2022 were £2,750.0 million (31 March 2021: £2,025 million, 30
September 2022: £2,750.0 million) with interest payable at the Bank of
England base rate.
The Group's remaining drawings under the Bank of England's original Term
Funding Scheme ('TFS') were repaid during the period, further improving the
maturity profile of the Group's borrowings.
While these long-term funding solutions are no longer available, the Group
retains access to other Bank of England funding channels for liquidity
purposes and has drawn on the Indexed Long-Term Repo ('ILTR') scheme in the
period.
The Group expects to continue to make use of facilities offered by the Bank of
England from time to time where this is appropriate and cost-effective, and
mortgage loans have been pre-positioned with the Bank of England to be
available to act as collateral for future drawings, if and when required. This
provides access to potential to be liquidity or funding of up to £2,066.2
million (30 September 2021: £1,424.2 million).
3.3 WHOLESALE FUNDING
The Group's wholesale funding, its borrowings from other institutions,
includes securitisation funding, warehouse bank debt and retail and Tier‑2
corporate bonds, each of which are issued from time to time where appropriate
and cost-effective. The Group's Long-Term Issuer Default Rating, a measure of
its strength as an issuer, was upgraded from BBB to BBB+ by Fitch in March
2022, with a stable outlook.
Capital markets remained strong in the period with demand for new issuance
high in the securitisation, tier-2 and AT1 markets, although conditions
weakened after the period end.
The Group renegotiated its £400.0 million warehouse funding facility during
the period, extending the maximum drawing to £450.0 million and transitioning
the interest margin from 0.60% above LIBOR to 0.50% over SONIA, reducing the
cost of funds drawn. This facility is used to provide additional funding
capacity, as well as providing an alternative funding route in the event of
market disruption elsewhere, where funds need to be deployed rapidly or where
an alternative to retail deposit funding is preferred.
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 placed in the market. No new issues have
been made in the period, but securitisation remains a key part of the Group's
funding strategy.
The Group's retail bond issued in 2015 was repaid at maturity in January 2022.
While the wholesale part of the Group's funding remained largely stable in the
period, these initiatives improved the maturity profile and enhanced the
overall cost of funds.
3.4 FUNDING OUTLOOK
The Group's funding base remains strong and flexible, with the retail savings
business continuing to develop, including through the issue of its first green
products, and the tenor and rates of its wholesale and central bank borrowings
improved. Together these delivered benefits to the Group's cost of funds in
the period. The continued close management of funding costs in a period of
base rate volatility will be key to the Group's future margin progression.
The business is well placed to continue to maintain and enhance this diverse,
robust and adaptable funding strategy, to support the growth, sustainability
and strategic development of the Group into the future.
4 CAPITAL AND LIQUIDITY REVIEW
The Group's capital policy is designed to provide attractive returns to
shareholders, preserve the strength of its balance sheet, maintain strong
regulatory capital and liquidity positions that safeguard its depositors, and
to ensure sufficient capital is available to meet strategic objectives and
opportunities going forward.
Over recent periods the Group has strengthened its capital and liquidity
positions as a safeguard against the risks of the Covid pandemic. As the
impacts from the virus have become clearer and the immediate impacts on the
economy have receded, those positions have been cautiously unwound, whilst
remaining mindful of other emerging risks.
The Group has continued its distribution policy, pursuing the buy-back
programmes described in the most recent annual accounts and proposing an
interim dividend for the period of half the 2021 final dividend in line with
policy.
For regulatory purposes the Group's capital comprises shareholders' equity and
its Tier-2 green bond. It has no outstanding AT1 issuance, but has the
capacity to issue such securities, if considered appropriate, under an
authority renewed by shareholders at the Annual General Meeting held in March
2022.
4.1 REGULATORY CAPITAL
During the half year the Group has continued to maintain strong regulatory
capital ratios, with capital balances being carefully managed in response to
the developing progress of the Covid pandemic and its aftermath, along with
other economic developments.
The Group is subject to supervision by the Prudential Regulation Authority
('PRA') and as part of this supervision the regulator sets a Total Capital
Requirement ('TCR'), the minimum amount of regulatory capital which the Group
must hold. The TCR is defined under the international Basel III rules, which
are implemented through the PRA Rulebook.
The TCR includes elements determined based on the Group's Total Risk Exposure
('TRE') together with fixed elements and is held in order to safeguard
depositors in the event of severe losses being incurred by the Group.
Transitional relief on the adoption of IFRS 9 was granted to the Group, along
with most other UK banks. Additional relief was granted in 2020 for the impact
on capital of provisions created in response to the Covid pandemic. This
relief is being phased out year by year, while any reversal of Covid-related
provisions will generate a corresponding reduction in relief.
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. As the reliefs taper over time, the regulatory and fully loaded
bases will converge. The Group's principal capital measures, CET1 and Total
Regulatory Capital ('TRC') are set out below on both bases.
Regulatory basis Fully loaded basis
31 March 2022 31 March 2021 30 September 31 March 2022 31 March 2021 30 September
2021
2021
£m £m £m £m £m £m
Capital
CET1 capital 1,092.4 1,057.3 1,055.8 1,070.5 1,015.9 1,026.1
TRC 1,242.4 1,203.8 1,205.8 1,220.5 1,161.5 1,176.1
Requirement
TCR 625.8 585.9 604.2 623.9 582.4 601.8
The Group's CET1 capital comprises its equity shareholders' funds, adjusted as
required by the Regulatory Capital Rules of the PRA, and can be used for all
capital purposes. TRC, in addition, includes tier 2 capital in the form of
Tier-2 Bonds, including the Group's green bond. This tier 2 capital can be
used to meet up to 25% of the Group's TCR. The increase in both capital
measures is driven by the positive trading performance over the six months and
the reduction in the Group's pension deficit, which outweighed the impact of
the proposed dividend and the 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 increase in requirements shown above relates
principally to the growth in the Group's asset base over the periods shown.
The TCR at 31 March 2022 represents 8.8% of TRE, in line with the 8.8%
calculated at 30 September 2021 and the 8.9% at 31 March 2021, and the
regulatory minimum of 8.0%.
The Group's 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 TRE. During the period the
CCoB remained at 2.5%, its long-term rate, while the CCyB remained at 0.0%,
the rate set by regulators in response to the Covid pandemic. The long-term
rate of the CCyB in normal circumstances is expected to be 2.0% and the Bank
of England has announced an increase to 1.0% from December 2022.
The capital requirement in respect of these CRD IV buffers increased in the
period to £177.4 million at 31 March 2022 (30 September 2021: £170.9
million) on the regulatory basis.
Further buffers may be set by the PRA on a firm-by-firm basis but may not
be disclosed.
The Group's capital ratios, after allowing for the proposed interim dividend
and the irrevocably committed element of the buy-back programme, are set out
below.
Regulatory basis Fully loaded basis
31 March 2022 31 March 2021 30 September 2021 31 March 2022 31 March 2021 30 September 2021
CET1 Ratio 15.4% 16.0% 15.4% 15.1% 15.5% 15.1%
Total Capital Ratio 17.5% 18.2% 17.6% 17.3% 17.7% 17.3%
UK Leverage Ratio 7.4% 7.7% 7.5% 7.3% 7.4% 7.3%
The Group's capital ratios remained relatively stable over the period, with
the additional capital generated from profitable trading required to support
the asset growth in the period. As the IFRS 9 reliefs gradually phase out, the
measures on the fully loaded basis are converging to those on the regulatory
basis.
The Basel Committee on Banking Supervision ('BCBS') originally set the
implementation date for its revisions to the Basel III framework (Basel 3.1)
as 1 January 2023. This was, however, subject to those revisions being enacted
in the relevant jurisdiction, a process which has been delayed by the
pandemic. In the UK these rules are expected to be enacted through the PRA
Rulebook and the regulator has indicated a delay to its target implementation
date to 1 January 2025. The regulator has also announced its intention to
publish a consultation paper on the implementation of Basel 3.1 in the UK in
the fourth quarter of the 2022 calendar year.
The PRA has also launched a more extensive consultation on its approach to
regulating non-systemically important banks without international activities,
although the initial focus of this exercise is to be on banks with assets of
less than £15 billion. 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 Internal Ratings Based ('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, albeit the PRA are still developing their requirements based
on work they are currently undertaking on existing IRB banks' hybrid models.
The overall application process is therefore likely to take longer than
originally anticipated to allow for the inclusion of these revised
requirements in the Group's models and their consequent review by the PRA as
part of the application process.
4.2 LIQUIDITY
The Group's policy is to hold sufficient liquidity in the business to meet its
long and short-term cash requirements, as well as to provide a buffer under
stress, at all times operating within regulatory requirements. 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 is a measure of short-term resilience which 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 148.8% compared to 175.8% during the first six months
of the 2021 financial year, and 165.6% during the 2021 financial year as a
whole. These movements reflect the Group's build-up of liquidity buffers in
response to Covid during 2020, and the relaxation of these buffers as the
effects of the pandemic became clearer.
The NSFR is a longer-term measure of liquidity with a one-year horizon,
supporting the management of balance sheet maturities. At 31 March 2022 the
Bank's NSFR stood at 121.2% (30 September 2021: 119.6%, 31 March 2021:
119.3%), reflecting a marginal strengthening of the position.
4.3 DIVIDENDS AND DISTRIBUTION POLICY
The Group manages its capital cautiously and has a strong cash position at 31
March 2022. Coupled with the operating profit in the period this means that it
remains appropriate for the Group to return capital to its investors, both in
the form of dividends and through share buy-backs.
The Group's policy is that the interim dividend should, in normal
circumstances, be equal to 50% of the preceding final dividend. Following a
review of the capital position and forecasts, and considering the capital
impacts of the stress testing carried out as part of the ICAAP and forecasting
processes, the Board determined that a distribution in accordance with the
Group's normal policy was appropriate.
It therefore declared an interim dividend for the year ending 30 September
2022 of 9.4 pence per share (2021 H1: 7.2 pence), 50% of the 18.9p final
dividend declared for 2021. This dividend will absorb £22.7 million of
capital and will be paid on 29 July 2022 to shareholders on the register on 8
July 2022.
The directors have considered the distributable reserves and cash position of
the Company and concluded that such a dividend is appropriate.
At the time of publication of the Group's 2021 results it announced that the
Board had authorised a share buy-back of up to £50.0 million of shares in the
market, in addition to the completion of the remaining small element of the
June 2021 buy-back programme.
In the six month period the Group had expended £27.2 million (including
costs) on the acquisition of its own equity, acquiring 5.0 million shares. The
Group gave an irrevocable authority for the acquisition of further shares
under this programme during the half year closed period, leaving £12.5
million still to be disbursed at the date of approval of this report.
Given the strength of the capital position at 31 March 2022 and the robust
trading performance, the Board has authorised a £25.0 million extension to
the programme, which is expected to be completed in the second half of the
financial year.
The Group has the authority to make such purchases under a resolution approved
by shareholders at the Annual General Meeting in February 2021 and renewed in
March 2022. All purchases made under this programme are announced through the
Regulatory News Service ('RNS') of the London Stock Exchange on the day of the
transaction. All shares purchased are initially to be held in treasury.
4.4 CAPITAL OUTLOOK
The Group has a strong capital base and liquidity and has demonstrated the
strength of its processes for forecasting and managing its position. Its
requirements are kept under regular review, in light of the level and form of
capital required by the current business, its strategic priorities and the
regulatory and economic outlook.
The Group's position allows for a strong level of return to shareholders, both
in the form of dividends and share buy-backs, even after the return of CCyB
requirements and the withdrawal of IFRS 9 reliefs are factored in. This
position remains both prudent and sustainable and helps ensure the viability
of the business for the benefit of all stakeholders.
5 FINANCIAL RESULTS
The Group's results for the six months ended 31 March 2022 reflect a
continuation of the momentum reported at the 2021 year end. Operating profit
before impairment provisions increased by 20.1% compared to the first half of
the 2021 financial year, to £106.8 million (2021 H1: £88.9 million). The
easing of Covid pressures and continued strong growth in UK house prices saw
the reversal of impairment provisions and an increase of 27.3% in underlying
profit to £105.5 million (2021 H1: £82.9 million) (Appendix A).
Upward pressures on market interest rates resulted in significant fair value
gains being booked on derivatives held to hedge the Group's new lending
pipeline. While the impact of these gains increased profit before tax on the
statutory basis by 49.0% to £143.6 million (2021 H1: £96.4 million),
operationally these represent timing differences which will reverse in future
periods, rather than core income to the Group and they are therefore excluded
from underlying performance in the Group's disclosures.
These results, coupled with the Group's share buy-back programme, generated an
increase in underlying earnings per share ('EPS') of 29.4% to 32.6 pence per
share (2021 H1: 25.2 pence) (Appendix A), while EPS on the statutory basis
increased 51.5% to 44.4 pence per share (2021 H1: 29.3 pence).
5.1 CONSOLIDATED RESULTS
CONSOLIDATED RESULTS
For the six months ended 31 March 2022
2022 H1 2021 H1
£m £m
Interest receivable 254.7 238.6
Interest payable and similar charges (79.5) (91.1)
Net interest income 175.2 147.5
Other operating income 6.5 7.2
Total operating income 181.7 154.7
Operating expenses (74.9) (65.8)
Provisions for losses (1.3) (6.0)
105.5 82.9
Fair value net gains 38.1 13.5
Operating profit being profit on ordinary activities before taxation
143.6 96.4
Tax charge on profit on ordinary activities (34.5) (22.2)
Profit on ordinary activities after taxation 109.1 74.2
2022 H1 2021 H1
Basic earnings per share 44.4p 29.3p
Diluted earnings per share 43.0p 28.3p
Dividend - rate per share for the period 9.4p 7.2p
Income
Total operating income for the six months increased by 17.5% to £181.7
million (2021 H1: £154.7 million), with loan interest continuing to form the
largest part of the balance.
The Group increased its net interest margin ('NIM') by 25 basis points
(Appendix B) compared to the first half of 2021, with tighter retail funding
costs and changes in product mix delivering improved yield. When coupled with
a 7.3% increase in the average loan book to £13,658.8 million (2021 H1:
£12,723.9 million), this generated an increase of 18.8% in net interest
income to £175.2 million compared to the first half of 2021 (2021 H1: £147.5
million).
The progression of the Group's annualised NIM, including and excluding the
Idem Capital division, over the first half of each of the past five years is
set out below.
Total Excluding
Idem Capital
Basis points Basis points
Six months ended 31 March
2022 257 248
2021 232 220
2020 229 214
2019 224 189
2018 216 150
This demonstrates the improvement in the Group's NIM over the period, despite
the rundown of the Idem Capital books, which had historically generated higher
NIM than other parts of the business. This represents the careful long-term
management of yields across the Group's businesses and improvements in the
average cost of funds as the funding strategy has developed.
Other operating income was £6.5 million for the six month period, reduced
from the £7.2 million reported for the first six half of the 2021 financial
year. The reduction arises principally from a reduction in third party
servicing income from non-core activities.
Costs
Operating expenses increased by 13.8% in the period, reaching £74.9 million
(2021 H1: £65.8 million). The majority of this increase is driven by payroll
costs, with employment-related costs comprising 66.9% of total operating
costs.
The Group's average headcount in the period was 1,480, 4.7% greater than in
the comparable period in 2021 (2021 H1: 1,413). Combined with an average 5%
pay increase at the beginning of the period and a focus on specialist roles
amongst new positions, this saw a 12.3% increase in people costs in
the period.
The Group's wider cost base has also been impacted by increasing levels of
inflation in the UK economy. The Group's digitalisation programme has also had
a significant impact on cost, with major projects taking place across all the
Group's principal business lines. Much of this work is carried out in-house,
impacting on employment costs, but significant external expenditure is also
being incurred. The reliance on internal resource means that the Group
capitalises relatively little in respect of software developments, taking
costs in current expenditure. Only £0.6 million of such costs were
capitalised in the period (2021 H1: £1.4 million).
The Group's IRB programme has continued through the period, as described in
section 4 above. While the benefits of the programme will be long-term, costs
of developing the approach are expensed as they arise.
The progress of the Group's cost:income ratio (Appendix C) over the first half
of each of the last five years is set out below.
As disclosed Idem excluded
% %
Six months ended 31 March
2022 41.2 41.7
2021 42.5 44.1
2020 41.8 43.5
2019 42.8 49.1
2018 42.2 56.8
Total cost:income has remained broadly stable, despite the levels of
expenditure incurred to develop the business for the future, and the falling
away of Idem Capital income.
The efficiency of the Group's operations remains a key focus of its strategy.
The Group continues to invest in digitalising the business and to develop its
people and risk management processes. It has also transitioned to a new hybrid
working model post-pandemic. Control of costs remains a priority, particularly
in the current inflationary environment. Against this backdrop, the reduction
in the cost:income ratio in the period is encouraging, however the achievement
of a sustainably lower cost:income ratio remains a longer-term aspiration,
rather than a short-term priority.
Impairment provisions
The gradual retreat of the Covid pandemic in the six months, and the unwinding
of the effects of some of the UK Government's interventions in response to it,
have increased the level of visibility around the drivers of expected credit
loss ('ECL'). However, the Group has maintained a cautious, evidence-based
approach to any potential revisions in its credit predictions. While there has
yet to be significant utilisation of Covid-related provisions, except in a
limited number of cases, the amount of excess cash balances in both the
consumer and SME lending sectors is still providing a near-term cushion
against default. There are increasing pressures on both consumers and
businesses from interest rates and prices, both rising at rates not seen in
many years, and the full impact of the present conflict in Ukraine on the UK
economy is also uncertain.
The balancing of these factors has led to a charge of £1.3 million being
reported in the half year (2021 H1: £6.0 million). The progress of the
impairment charge and annualised cost of risk (Appendix B) in the first six
months of each of the four years since the introduction of IFRS 9 in 2019 is
set out below.
Charge Cost of risk
£m %
Six months ended 31 March
2022 1.3 0.02
2021 6.0 0.09
2020 30.0 0.49
2019 4.9 0.08
The half year ended 31 March 2020 saw the outbreak of the Covid pandemic and
the largest part of the provisions made by the Group in response to Covid were
booked in that period.
The absolute level of provision in the Group's balance sheet remains elevated.
£55.2 million of provision was held at 31 March 2022, providing a coverage
ratio of 40 basis points. This compares to £82.4 million (64 basis points) at
31 March 2021 and £65.4 million at 30 September 2021 (49 basis points),
although remains higher than the £41.9 million (34 basis points) carried at
30 September 2019, before the onset of the virus.
With the Group's buy-to-let mortgage portfolio representing the largest part
of its exposure, coverage ratios would normally be expected to fall as house
prices rise, increasing the value of security held. Over the period between
30 September 2019 and 31 March 2022 the average loan-to-value ratio on the
buy-to-let portfolio reduced from 67.4% to 59.2%.
Multiple economic scenarios and impacts
The calculation of ECL for IFRS 9 purposes requires the consideration of
multiple economic scenarios. While the immediate impacts of Covid had begun to
recede during the period, the uncertainties surrounding its longer-term
effects continued to pose difficulties for economic forecasters, even before
the beginning of conflict in Ukraine. The impacts of rising interest rates and
inflation are also uncertain, especially given the prospects of changes on a
scale not seen for some years.
The Group's approach to setting economic scenarios at 31 March 2022 is similar
to that used at the previous year end. The Group's approach can be summarised
as:
· A central scenario was derived based on public forecasts. This is
somewhat less optimistic than the central scenario used at 30 September 2021,
reflecting market expectations of higher interest rates and increased
inflation.
· The upside and downside scenarios were derived from the central
scenario, being more benign or severe variants of this, but broadly similar in
trajectory.
· The severe scenario has been set to represent the population of
potential negative outturns, whether through an economic downturn, a
resurgence of the pandemic, or the effects of the conflict in Ukraine. As such
it represents a radically different outcome for the UK to the other scenarios.
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.
The weightings applied to each scenario have been held at those used at both
30 September 2021 and 31 March 2021. While the fading impacts of the pandemic
might have led to a more benign reweighting of scenarios, the mounting
headwinds from other directions militate against such a move. 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 on the Group's IFRS 9 models, the
impairment provision at 31 March 2022 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 41.1 0.29%
Central scenario 34.3 0.25%
Severe scenario 82.6 0.59%
The calculated provisions remain lower than might be expected, given the
uncertain economic outlook. It is clear that this must relate, in part, to the
model build process. The data on which the Group's ECL models were based
includes relatively few observations under scenarios similar to those
predicted, which will make any resulting model less reliable.
It is also clear that the additional cash reserves of businesses and
households will delay the manifestation of underlying credit issues in the
normal metrics, which will have the effect of reducing calculated ECLs.
To compensate for these effects, the Group calculates post-model adjustments
('PMA's) to ensure the adequacy of its ECLs.
Post-model adjustments
In order to ensure that its loan portfolios are adequately provisioned, the
Group considers whether there are factors not fully captured by the modelling
process, including economic conditions more generally which indicate a need
for PMAs. Information considered includes credit data, customer and broker
feedback received, the results of insight surveys, industry intelligence and
expert knowledge within the business lines.
In the six month period, the dominance of Covid in these considerations
reduced as the short-term impact of the pandemic receded and other economic
factors such as the UK cost of living, rising interest rates and the conflict
in the Ukraine became more significant.
The Group's impairment models rely on the historically observed linkage
between actual credit indicators at the reporting date, such as credit bureau
data and arrears metrics, and future credit being reliable in current
circumstances. Where this is likely not to be the case, the predictive power
of the models is diminished.
The derivation of these models is based on historic credit data and, as with
all such models, their inherent reliability is higher when operating over
scenarios similar to those previously observed than when dealing with novel
situations.
In the present situation there is evidence that the availability of cash
reserves in the economy, either built up over the Covid period or as a result
of Government support, may be delaying the manifestation of credit issues and
causing models to predict a lower ECL than is strictly appropriate. There is
also no mechanism whereby the models can evaluate the long-term effects of
'scarring' from the pandemic on particular customers or industries.
It is also notable that the economic scenarios discussed above include
variables such as inflation increasing more rapidly than historically
observed, and to higher levels than seen for many years. This will inevitably
reduce the effectiveness of the models.
To compensate for these effects, which would tend to understate ECLs, the
Group applies PMAs, based on its experience and its understanding of current
customer and market positions, to allow for the potential shortfall.
The requirement for PMAs relates primarily to two concerns: the extent to
which ongoing Covid impacts are delaying defaults across the books, and
supressing ECLs in the models; and the divergence of present economic
forecasts from recent history, which potentially impacts on the ability of
models to fully capture future uncertainties.
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.
In conjunction with this 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 occurrence of
a limited number of these types of default in the period.
The Group additionally considered the need for an uplift to ECLs to allow for
the potential for cost of living, affordability and employment issues inherent
in its economic forecasts.
The PMAs generated by this process, analysed by division are set out below.
31.03.2022 30.09.2021 31.03.2021 30.09.2020
£m
£m
£m
£m
Mortgage Lending 7.8 8.9 19.2 14.0
Commercial Lending 6.3 10.2 7.3 5.8
Idem Capital - 0.3 1.0 -
14.1 19.4 27.5 19.8
These broader assessments were then allocated amongst accounts, focussing on
higher risk segments, or accounts where sufficient data existed to identify
any issues. In particular, Covid-related PMAs in the mortgage book were
focussed on accounts previously having been granted payment holidays, which
still show signs of increased payment volatility compared to other loans. Any
accounts identified as being 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
more evidence of post-Covid customer behaviour, and of the effects of the new
economic environment on defaults and model behaviour, before significantly
amending its approach to PMAs.
Ratios and trends
The results of the Group's ECL modelling, including the impact of the economic
scenarios described above, together with PMAs adopted to address uncertainties
over the future performance of accounts, have resulted in the overall
provision amounts and coverage ratios set out below.
31 March 30 September 31 March 30 September
2022 2021 2021 2020
£m £m £m £m
Calculated provision 41.1 46.0 54.9 62.0
PMAs 14.1 19.4 27.5 19.8
Total 55.2 65.4 82.4 81.8
Cover ratio
Mortgage Lending 0.27% 0.30% 0.43% 0.44%
Commercial Lending 1.18% 1.74% 2.00% 1.85%
Idem Capital 1.01% 1.27% 1.79% 1.62%
Total 0.40% 0.49% 0.64% 0.64%
The coverage ratios continue to demonstrate the movement in the Group's
overall provisioning back towards more normal levels, although remaining
higher than the 0.34% coverage ratio seen at 30 September 2019, before the
outbreak of the pandemic. This level was recorded when security cover in the
buy-to-let book was lower, with an average loan to value of 67.4% compared to
the 59.2% recorded at 31 March 2022. 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 gains reported in the profit and loss account relate entirely
to the Group's hedging operations. No speculative derivative trading is
undertaken. The Group hedges against its pipeline of fixed rate mortgage
business to ensure that desired yield levels are achieved on completed loans.
However accounting standards require that while such derivatives form an
economic hedge, they must be fair valued for accounting purposes and any gain
taken to profit. Where market interest rate expectations move significantly,
this leads to the recording of large gains or losses, which will ultimately
reverse over the lives of the loans being hedged.
During the period there was a high level of volatility in interest rate
expectations, which has created a fair value gain of £38.1 million for the
six months (2021 H1: £13.5 million). These gains are non-cash movements, and
the Group has consistently excluded them from its definition of operating
profit as distortive and unhelpful in assessing the Group's true performance.
Taxation
The effective tax rate of the Group in the period was 24.0%, with the increase
from the rate in the comparable period in the previous year principally a
result of a higher proportion of the Group's profit, including the majority of
fair value gains, arising in Paragon Bank. The Group operates in the UK only
and materially all its profit falls within the scope of UK taxation. The
standard rate of UK corporation tax applicable in the period was 19.0%, with
the surcharge applicable to Paragon Bank profits at 8.0%, both as in the
previous year.
While the standard rate of taxation applicable to the Group will rise to 25.0%
from April 2023, this will be mitigated, to some extent, by a reduction of the
bank surcharge to 3.0% and an increase in the profit threshold over which it
becomes chargeable, both enacted in the period.
Result
The Group's overall consolidated profit before tax for the six month period
was £143.6 million (2021 H1: £96.4 million) an increase of 49.0%. Profit
after tax increased by 47.0% to £109.1 million (2021 H1: £74.2 million). In
addition, other comprehensive income of £10.6 million was recorded (2021 H1:
£4.0 million) mostly related to valuation gains on the Group's defined
benefit pension plan (the 'Plan').
As a result of these, total consolidated equity increased to £1,279.7 million
(31 March 2021: £1,203.8 million) and consolidated tangible equity to
£1,109.6 million (31 March 2021: £1,033.3 million), representing a tangible
net asset value ('NAV') of £4.59 per share (31 March 2021: £4.07 per share)
and a NAV on the statutory basis of £5.30 (31 March 2021: £4.74) (Appendix
D).
The information on related party transactions required by DTR 4.2.8(1) of the
Disclosure Guidance and Transparency Rules is given in note 25.
5.2 ASSETS AND LIABILITIES
The Group's assets and liabilities at the period end are summarised in the
balance sheet below.
SUMMARY BALANCE SHEET
31 March 2022
31 March 31 March 30 September
2022
2021
2021
£m £m £m
Loans to customers
Mortgage Lending 11,999.2 11,130.6 11,608.7
Commercial Lending 1,719.7 1,427.1 1,568.8
Idem Capital 196.0 258.6 225.2
13,914.9 12,816.3 13,402.7
Derivative financial assets 201.7 180.7 44.2
Cash 1,500.4 2,103.0 1,360.1
Pension surplus 4.4 - -
Intangible assets 170.1 170.5 170.5
Other assets * (40.5) 218.3 159.5
Total assets 15,751.0 15,488.8 15,137.0
Equity 1,279.7 1,203.8 1,241.9
Retail deposits 9,853.7 8,631.2 9,300.4
Other borrowings 4,460.1 5,466.8 4,451.4
Derivatives financial liabilities 32.5 76.2 43.9
Pension deficit - 11.8 10.3
Other liabilities * 125.0 99.0 89.1
Total equity and liabilities 15,751.0 15,488.8 15,137.0
* Other assets and other liabilities include fair value hedging
adjustments on loans to customers and retail deposits respectively (note 12).
The principal driver of movements in the Group's balance sheet is the size and
composition of its loan book. This, together with the Group's policies on
capital and liquidity determines its funding requirements and the level of its
liabilities.
Despite the continuing uncertainties in the UK economy, the portfolio
increased by 8.6%, year-on-year, with particularly strong growth in the
Commercial Lending division, and continuing amortisation of the Idem Capital
books. These movements are discussed in more detail in the lending review
(Section 2 above).
Funding structure and cash resources
Overall the Group's retail and wholesale debt funding increased by 1.5%
year-on-year, with the impact of the loan book growth offset by a relaxation
of liquidity policy which saw cash balances reducing 28.7% over the last
twelve months. The funding mix continued to move towards retail funding with
68.8% of debt funding represented by savings balances at 31 March 2022
compared to 61.2% at 31 March 2021. These movements are discussed in more
detail in Section 3 above.
Derivatives
All the Group's derivative assets and liabilities relate to hedging
arrangements for fixed rate mortgage and savings products. These are shown on
the balance sheet at fair value, which is a function of movements in market
expectations of interest rates. Increased expectations of interest rate rises
generated growth in such assets from £27.7 million at 31 March 2021 to
£201.7 million at 31 March 2022 (30 September 2021: £44.2 million).
Derivative assets at 31 March 2021 includes £153.0 million of cross-currency
basis swaps, relating to securitisation transactions paid down in 2021.
Interest rate expectations also impacted derivative liabilities, which reduced
to £32.5 million (31 March 2021: £76.2 million, 30 September 2021: £43.9
million).
While the element of these movements relating to pipeline hedging contributed
towards the fair value movements in the profit and loss account described
above, they were largely offset by movements in the balance hedge accounting
adjustments, with the adjustment to loans to customers (included in sundry
assets above) credited by £157.0 million in the six months and that to retail
deposits (included in sundry liabilities) debited by £27.9 million (note 12).
Pension obligations
The valuation basis prescribed by IAS 19 for pension exposures requires the
underlying assumptions to be based on market interest and bond rates at the
period end, and can be subject to fluctuations where different market measures
do not move at the same rate. During the period corporate bond yields, used to
derive the discount rate, increased faster than long-term gilt yields, used to
model inflation, eliminating the accounting deficit on the Plan and generating
a surplus of £4.4 million at the period end (31 March 2021: £11.8 million,
30 September 2021: £10.3 million).
While the IAS 19 valuation is required to be used in the Group's accounts,
pension trustees generally use the technical basis set out in the Pensions Act
2004. On this basis, which includes the effect of a charge given over the
Group's head office building, the Plan had a surplus of £1.5 million at 31
March 2022 (31 March 2021: £5.8 million, 30 September 2021: deficit of £1.0
million), meaning that the scheme was fully funded on this basis. A full
triennial valuation of the Plan is taking place as of 31 March 2022, and the
Group's future levels of contribution will be agreed with the Trustee
following the completion of the exercise.
Other assets and liabilities
The movements in sundry assets and sundry liabilities relate principally to
the movements in fair value adjustments described above. Excluding these
movements sundry assets were £111.0 million (31 March 2021: £160.2 million,
30 September 2021: £154.0 million), driven by a reduced requirement to post
collateral deposits against derivative liability positions, a further result
of the movements described above.
Sundry liabilities excluding fair value adjustments increased significantly to
£155.9 million (31 March 2021: £95.9 million, 30 September 2021: £92.1
million), with the principal movement being a substantial increase in
collateral received from counterparties to derivative asset positions.
5.3 SEGMENTAL RESULTS
The underlying operating profits of the three segments described in the
Business Review in Section 2 are detailed fully in note 2 and are
summarised below.
Six months to Six months to Year to
31 March 2022 31 March 2021 30 September 2021
£m £m £m
Segmental profit
Mortgage Lending 116.6 92.4 213.8
Commercial Lending 41.6 37.6 75.7
Idem Capital 6.6 8.7 17.1
164.8 138.7 306.6
Unallocated central costs and other one-off items (59.3) (55.8) (112.4)
105.5 82.9 194.2
The Group's central administration and funding costs, principally the costs of
service areas, establishment costs and interest on excess liquidity and bonds
have not been allocated.
Mortgage Lending
NIM in the Group's core Mortgage Lending operation continued to improve in the
period, increasing by 19 basis points to 207 basis points. This was driven by
the gradual replacement of legacy assets by new business and a tightening of
funding costs. Coupled with a 7.6% increase in the average mortgage book to
£11,804.0 million (31 March 2021: £10,975.0 million) this generated an 18.4%
increase in net interest for the segment to £122.1 million (2021 H1: £103.1
million).
Credit performance in the mortgages books has remained strong, even as the
impacts of Covid-related government support initiatives diminishes. This has
driven a net release of £1.0 million of impairment provision in the six
months (2021 H1: charge of £4.9 million).
Together these created an increase of 26.2% in contribution made by the
segment to group profit to £116.6 million for the six months compared to the
corresponding period in 2021 (2021 H1: £92.4 million).
Commercial Lending
Segmental profit in the Commercial Lending division increased to £41.6
million, an increase of 10.6% compared to the first half of 2021 (2021 H1:
£37.6 million).
Net interest for the portfolio increased by 15.9% compared to the first half
of 2021. This was largely driven by an 11.8% increase in the average loan book
to £1,644.2 million (31 March 2021: £1,471.0 million), but also reflects a
24 basis point improvement in NIM between the two periods, generated through
product mix changes, yield management and tighter funding costs.
Impairment charges for the period, at £3.2 million were increased by 146.2%
compared to the first half of 2021 (2021 H1: £1.3 million). Impairments in
this division, particularly for SME lending balances have reversed more slowly
following the Covid pandemic, compared to the Group's other portfolios. The UK
Government's RLS, CBILS and BBLS initiatives supplied significant cash
liquidity into the SME sector and there is evidence that some part of this
cash remains available to satisfy finance liabilities in the short term,
potentially deferring defaults in the sector. The charge was also impacted by
a significant one-off external fraud case, which also affected a significant
number of other lenders in the sector, in many cases relatively more severely.
Idem Capital
The contribution from the Idem Capital division continues to reduce as the
loan portfolio amortises. Segmental profit was reduced by 24.1% to £6.6
million, compared to the first half of 2021 (2021 H1: £8.7 million), broadly
in line with the 24.2% decline in the average loan balance.
6 OPERATIONAL REVIEW
The success of the Group's strategy is based on the strength of its people,
systems and controls and the continuing development of these alongside the
evolution of its business is an ongoing focus at senior management levels. The
Covid pandemic demonstrated the Group's agility and flexibility in resource
deployment, which are fundamental to the execution of this strategy.
It was very pleasing that the Group's commitment to its people was recognised
by the award of Platinum Investors in People ('IiP') status, the highest level
available, achieved by only 3% of employers assessed.
The easing of Covid restrictions during the six months has seen a continual
development of working arrangements as employees increasingly returned to the
Group's premises, and hybrid working methods were trialled and then adopted on
an ongoing basis. At the same time IT and process developments continued to
progress, supporting the Group's digitalised vision of its future operating
model, while the enterprise risk management framework has further evolved to
ensure that the business remains robust.
All these streams combine to give the Group an operational structure on which
it can rely to deliver its business strategy.
6.1 OPERATIONS
The Group now has over 1,500 people, the majority of whom have a base in one
of its office buildings, which they use as part of a hybrid working model. In
order for the Group to provide the best possible service to customers and
remain successful, individual business areas have taken different approaches
to implementing the flexibility this offers. This approach was adopted in the
period, building on the experience of people working from home during the
Covid pandemic.
The Group's success in continuing to progress the development of new systems,
processes and products during the Covid pandemic meant that it entered the
half year well positioned to deliver enhancements in the period.
During the six months the Group was able to complete or progress a significant
number of technological, operational and regulatory projects. Long-term
projects to provide better technology for the development finance, SME lending
and savings operations continued in the period, with enhancements becoming
available to support customers and intermediaries, while shorter term projects
provided enhancements to surveyors' administration, treasury systems, video
conferencing, email and cyber security and interactions with vulnerable
customers.
The operational resilience of the business remains an important area of focus
for the Group. During the period the formal self-assessment required by
regulators was successfully completed, endorsing the Group's investment of
time and resources in this area over recent periods.
The Group considers that its offices remain valuable in the new era of hybrid
working. Offices will play a significant role in fostering collaboration,
collegiality, creativity and the growth of the Group's culture and identity.
The Group continues to review its locations to ensure they are optimised for
new working methods and to manage their energy efficiency. As part of that
process the Group's SME lending hub was relocated within the Southampton area,
to a more suitable building with a better environmental impact. The Group's
premises in Cardiff and Poole were also replaced with more appropriate
facilities.
The Group has maintained its focus on high quality customer service throughout
the period and is currently working to embed the new FCA Customer Duty
requirements in its systems and processes. The Group focusses on FOS
complaints data as a high level satisfaction metric, and incident levels
remained low throughout the period.
Consolidated information for the two group companies required to report to
FOS, for the four most recent FOS reporting periods, is set out below.
Six months ended
31 December 30 June 31 December 2020 30 June
2021
2021
2020
Cases reported 35 50 60 40
Uphold rate 34.2% 34.0% 43.3% 41.3%
FOS data across the financial services industry is published on the
ombudsman's website at www.financial-ombudsman.org.uk. However, the Group's
complaint level has regularly been below the threshold for publication.
6.2 GOVERNANCE
The period has seen the further normalisation of the Group's governance,
following Covid, with more in-person interaction and face-to-face meetings.
However, the continuing impact of the pandemic has continued to be a major
focus for the Board, as well as newer threats to the UK economy, including
those relating to events in Ukraine and wider pressures on the costs of living
and doing business.
The Group continues to be subject to the 2018 UK Corporate Governance Code
('the Code') and the Group's procedures for compliance with the Code are set
out in the Annual Report and Accounts for 2021. The Group continued to comply
with the principles of the Code during the period. 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
As announced in the Group's 2021 year end results, Fiona Clutterbuck intends
to step down as Chair once a suitable candidate is appointed, and after an
appropriate handover period. During the period the Group has been progressing
the search for a new Chair and the result will be announced once an
appointment is finalised and regulatory approval received.
The Group is conscious of the need to ensure that the Board contains an
appropriate balance of skills, experiences and diversities. It has noted the
recent comments on diversity and governance from the PRA and the FCA, as well
as in the corporate world more generally and is in the process of appointing
an additional non-executive director, bearing this thinking in mind. Once
finalised this appointment will be announced to the market.
As at 31 March 2022, the Board had three female directors out of a total of
eight board members, forming 37.5% of the Board. This included the Chair of
the Board, one of the four most senior board positions, as defined by the FCA.
Remuneration policy
The PRA remuneration rules applicable to the Group were changed with effect
from the current financial year as it now qualifies as a Proportionality Level
2 ('Level 2') bank, bringing it within the scope of more onerous rules. This
is a result of both 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. Affected employees have been
determined and the changes required identified. The principal changes relate
to the arrangements for the provision of variable remuneration to such people
and the introduction of clawback and malus provisions to a larger group of
employees. Changes relating to executive directors' remuneration arrangements
were described in the 2021 Directors' Remuneration Report.
The Group's triennial review of its Directors' Remuneration policy will be
progressed during the second half of the financial year, for presentation at
the 2023 Annual General Meeting. Consultations will be held with shareholders,
investor bodies and other stakeholder groups, and we would urge such persons
to participate if invited.
6.3 PEOPLE
At 31 March 2022, the Group employed 1,507 people, an increase of 5.7% from
March 2021, and of 4.5% in the half year period. Most of these new roles are
in customer facing areas of the business. These people, and the way they
embody the Group's values in their working lives, are fundamental to the
achievement of the business strategy and it was particularly pleasing to be
recognised as a Platinum Standard employer in the recent Investors in People
reassessment.
Conditions and culture
The Group has adopted hybrid working across the business on a permanent basis,
following trials of various hybrid models over a number of months. The Board
and executive team are confident that employees can work effectively, meeting
business needs, and serving customers whilst working in different locations.
The Group promotes flexibility around how and where its people work, so that a
healthy work life balance can be achieved. No single approach will be optimal
for all roles and work continues at all levels of the business to identify the
most effective work patterns for people, teams and functions. The Group
understands the benefits that more flexible ways of working bring for many of
its employees, and a project is underway to ensure that the technological,
environmental, cultural and wellbeing needs of both the employees and the
business are addressed as the process of embedding this new way of working
continues.
The Group's triennial reaccreditation review process for IiP took place in
March 2022 resulting in an upgrade to Platinum Standard, the highest
available. This represents an endorsement of the Group's high performance
culture and focus on its people. This accreditation is only held by around
1,500 employers, 3% of the over 50,000 firms assessed. In the IiP assessors'
feedback they noted that:
"Achieving this level of maturity during a global pandemic is exceptional and
reflects the high levels of resilience, collaboration and empowerment
established within Paragon's people. Paragon ensures that everyone has a clear
focus on outcomes-based high performance and enables people to take
responsibility for their performance, talent development and continuous
improvement. Consequently employees outperform expectations with passion and a
strong sense of pride interlaced with a pinch of humour and clear integrity."
The Group maintains its accreditation from the UK Living Wage Foundation and
minimum pay continues to meet the levels set by the Foundation, last updated
in November 2021. Holiday entitlement was enhanced during the year, with all
employees receiving an extra day's holiday, increasing the maximum to 31 days.
The Group also allowed employees to carry over an additional five days holiday
into the 2022 / 23 holiday year and increased the amount of holiday which
could be sold as temporary measures to support employees who had been unable
to make use of their full holiday entitlements due to the impact of the Covid
pandemic.
Despite the unprecedented labour turnover in the UK, the Group's annual
attrition rate is running lower than pre-pandemic levels; 12.5% (March 2022)
compared to 15.3% in March 2020 (March 2021: 6.9%). The Group continues to
retain long-serving employees, with 30.2% of employees having achieved 10
years' service, of whom 12.6% had been with the Group for over 20 years.
Despite these levels of talent retention, the growth of the Group means that
vacancy numbers remain consistently higher than pre-pandemic and further
investment is being made in technology to streamline the recruitment and
on-boarding processes.
The Group's People Forum remains one of the main channels for employee
opinions to be fed back to the Board and Executive Committee. Both the Chair
of the Board and Chief Executive have met with the People Forum in the past
six months, and discussions have covered topics including the Group's
strategy; its approach to climate change and other ESG issues; and hybrid
working.
The wellbeing of the Group's employees remains central to its people strategy,
and the Wellbeing Team remain the cornerstone of the approach. The Wellbeing
Team is sponsored by the People Director and comprises a group of employees
who have been trained as mental health first aiders. The team provide a source
of support to employees and are there to signpost people to additional
resources and avenues of support in relation to emotional, social, financial
and physical wellbeing.
Equality and diversity
The Group remains focused on its equality, diversity, and inclusion ('EDI')
agenda, with oversight from the Board. The EDI Network continues to lead
campaigns to raise awareness and understanding of the importance of workforce
diversity and an inclusive culture. Activities have included the launch of
Executive Listening Circles, where members of the Executive Committee meet
with employees from underrepresented groups to listen to their experiences and
gain a different perspective, and the continued delivery of training including
a new Inclusive Leadership course which has been attended by over 60% of
managers.
The Group published its Gender Pay Gap report in March 2022 and reported a
mean pay gap of 38.4% at 5 April 2021 (2020: 40.7%) and median gap of 36.6%
(2020: 36.9%). Whilst the Group's 2021 gender pay gaps have improved slightly
since 2020, the measures remain larger than senior management would like. The
positive movement in results is attributable to the number of senior female
hires in the period and the number of successful candidates for senior roles
in sales and customer-facing roles was particularly pleasing. However, men
still continue to occupy the majority of senior roles in the organisation.
The Group continues to meet the FTSE Women Leaders target of boards having 33%
female representation (37.5% as at March 2022). The Group remains committed to
HM Treasury's Women in Finance Charter; the Group set itself the target of
achieving 35% of women in senior positions, using the FTSE Women Leaders
definition by January 2022 and as at this date achieved 36.4% female
representation. As of 31 March 2022, this position had improved further to
37.5% (34.6% as at March 2021). The first five-year phase of the Group's
Women in Finance initiative ended in January 2022, with all targets met and it
is now in the process of setting targets for the second phase to build on the
progress to date.
The Group remains committed to developing female talent, particularly in
specialisms where women have historically been under-represented. The latest
cohort of the Group's senior leadership development programme has 56% female
representation, and the Group continues to have mentors and mentees involved
in the 'Women Ahead 30% Club', a cross-company mentoring scheme.
A lack of socio-economic diversity at senior level in UK financial services
has been a concern for some time, and the Group is proud to have been part of
the foundation of Progress Together, a new nationwide membership body focussed
on addressing this, becoming a founder member at its launch in May 2022.
Training and development
Developing the managers and leaders of the Group has continued to be an area
of focus over the period. Training on Change Leadership, Leading Performance,
Inclusive Leadership, Transformational Leadership and Leading a Customer
Centric Culture continues to be delivered and well attended by the Group's
management population. The Group's well established Team Leader and Management
Academies also continue to run, with 45 employees currently enrolled on these
programmes and plans to enrol more later in the year. Two cohorts of employees
have passed through the High Potential Programme since its launch in 2021 with
33% of delegates having secured an internal promotion or change in role,
supporting succession at senior management levels.
The Group continues to make use of the Apprenticeship Levy scheme, with four
employees graduating from their apprenticeships and securing permanent roles
in the business so far this year. There are currently ten full time
apprentices working in the Group, with plans to recruit a further ten later in
the financial year. As well as dedicated apprenticeship programmes, the Group
utilises the levy through its Team Leader Academy programme. The Group
utilised 29% of its available levy pot in the past twelve months (34% as at
March 2021). The Group is also currently supporting 105 individuals with
funding to complete professional qualifications (31 March 2021: 135). Students
for the London Institute of Banking and Finance CeMap mortgage qualification
continue to be the most numerous amongst these.
6.4 SUSTAINABILITY
Sustainability, including resilience in the face of climate change risks, is
core to the Group's strategy: to focus on specialist customers, 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
• Offering green savings products to facilitate customers'
sustainable investment goals
Since 2021 the Group's overall response to climate change and other
sustainability issues has been coordinated by the Sustainability Committee,
which reports directly to the Executive Committee. This provides a forum for
sharing information on initiatives within business areas and helps to develop
the Group's overall response.
The Group published its first sustainability report, the 2021 Responsible
Business Report, in December 2021. This provides more detailed information on
its sustainability initiatives and demonstrates how sustainability is embedded
throughout the Group. It is available on the Group's corporate website at
www.paragonbankinggroup.co.uk.
Climate change
Climate change is designated as a principal risk within the Group's Enterprise
Risk Management Framework. As a result 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 Green Bond Framework reflects the Group's commitment to embed
sustainability throughout its strategy, operations, and product offerings
including funding and capital raising activities. The Sustainability Committee
is responsible for the Framework.
The Group recognises the importance of reducing the impact that its own
operations have on the environment. As a financial services provider the
Group's overall environmental footprint across its principal operations is
low. The Group is, however, committed to identifying, measuring and managing
the impact of its operations on the environment and to find ways to mitigate
any negative impacts. During the six months key initiatives included:
• Installing electric vehicle charging points at the Group's head
office building for use by employees
• Updating the company car policy so that only hybrid or electric
vehicles will be provided on new leases, eliminating diesel and petrol
vehicles from the company fleet by 2025. The Group's target is for a
completely electric-only fleet by 2031
• Relocating the Group's Southampton, Cardiff and Poole operations
to more energy efficient premises
• Continuing the rollout of LED lighting across the Group's
principal sites
Developments in sustainable products and climate-related exposures are
discussed in the relevant business reviews. Green initiatives launched or
expanded in the six months included:
• Expansion of the green mortgage range, providing a green
alternative to every product for customers whose properties have an EPC rating
of C or higher
• A green homes initiative in the development finance operation to
support the provision of new domestic properties with the highest energy
performance standards
• Motor finance lending on battery electric vehicles
The Group continues to develop its reporting to manage both its risk
management processes and its reporting under the principals set out by the
Taskforce on Climate-Related Financial Disclosure ('TCFD'). The Group is
required by the UK Listing Rules to report on climate change risk and
exposures under the TCFD framework in its 2022 year end accounts, building on
the disclosures introduced in 2021.
Social engagement
The Group's Charity Committee raised almost £43,000 for the Alzheimer's
Society, the employee's chosen charity for 2021, an outstanding result, given
the restrictions imposed on normal fundraising activities by the pandemic. For
2022 employees voted to support Mind and fundraising has continued through the
first three months of the year, both in the Group's offices and virtually.
Employees are also using their entitlement to an annual paid volunteering day,
particularly as more opportunities become available with the loosening of
Covid restrictions. Employees have already supported 15 projects with 10
different community organisations and the Group is targeting 250 volunteer
days for 2022.
6.5 RISK MANAGEMENT
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.
Risk environment
During the last six months the Group has continued to respond to the
challenges posed by the ongoing pandemic, however the vaccine roll-out and the
gradual return to pre-Covid society have enabled the Group to develop and
implement a hybrid working model. This is seen as key to the Group's overall
strategy, enabling it to retain and attract a strong workforce and remaining
agile and resilient in its risk management capability. This is coupled with
the Group's risk management framework which has provided a robust mechanism to
ensure that new risks are promptly identified, assessed, managed and
appropriately overseen from a risk governance perspective. However, it is
recognised that the wider pandemic is still a global challenge, and the
possibility of further waves and subsequent lockdowns may still pose further
issues during the coming months.
Whilst Covid has dominated the recent risk landscape, there are a number of
strategic risk issues which the Group has identified, or continued to focus
on, during the six-month period:
· The impact of the ongoing conflict between Russia and Ukraine is
still uncertain and the Group is monitoring the position carefully. In
immediate response to the outbreak of the conflict the Group has identified
and ringfenced any potential exposures to Russian, Belorussian or Ukrainian
customers and suppliers and close oversight is being maintained through
ongoing customer due diligence and risk assessment processes. In addition, the
Group continues to invest in its cyber controls given heightened threat
assessments posed by this situation
· Increasing inflationary pressures in the UK have required the Group
to ensure that high standards of prudent lending are maintained, particularly
in an environment of rising interest rates and cost pressures for both new and
existing borrowers. The Group takes a forward-looking, as well as current
view of affordability, and has adjusted policy to ensure loan repayments are
sustainable for customers, and will continue to do so
· The continued embedding of the Group's operational resilience
capability, given its proven criticality in the handling of the pandemic, and
the incorporation of lessons learned into the overarching framework. This will
be key as the Russian-Ukrainian situation develops, given uncertainties around
how impacts from the conflict may manifest themselves globally
· Prioritising focus on climate change given the associated risks,
remains an ever-present challenge. The UK Government has confirmed its goal of
net zero carbon by 2050 and the Group, and the rest of the financial services
industry, have a vital role to play in that commitment. The Group considers
the impacts of climate change risk through both its operations, and its
lending activities and continues to evolve its approach to measure and
mitigate the transition and physical risks potentially caused by climate
change
These issues are expected to continue to dominate the risk landscape through
the second half of the year, particularly with the overall levels of economic
uncertainty in the UK and the prospect of levels of inflation and interest
rates not seen for many years. The Group will carefully monitor the emerging
impacts on both credit risk and the wider risk landscape as the situation
develops.
The Group continues to review its exposure to emerging developments in the
Brexit process as further clarity is received as to the UK's future trading
and regulatory relationships with the EU. While 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. The Board has kept the situation under ongoing review throughout the
period and continues to do so and considers that the Group is well placed to
address the challenges.
Risk management processes
During the six-month period the Group has continued to invest in and mature
its risk management capability, ensuring it is further developing its ability
to manage all categories of risk as the business develops. Significant
progress has been made in enhancing the Group's enterprise risk management
framework ('ERMF') with the implementation of a revised suite of policies
across principal risks, including revisions to risk appetites, and further
work on the approach to embedding a robust and pervasive risk culture across
the Group.
The continued evolution of the ERMF is a key strategic priority and
considerable work has been undertaken to mature and expand risk processes and
resources to ensure that all risks are managed within stated appetites. The
Group continues to review its risk approach to ensure it remains effective and
proportionate in terms of both maturity and operation and is committed to
further enhancement of the ERMF over the coming years.
Whilst the pandemic has continued to provide its own unique set of challenges
through the half year, including re-deployment of resource and priorities, the
Group is committed to continuing to deliver on key risk management initiatives
in the period including:
• Consumer duty - Assessing the impact of the new FCA Consumer Duty
on the products and services offered across the Group ensuring that the
Group's culture is driving good outcomes for its customers
• Operational resilience - Ongoing embedding of operational
resilience capabilities. This has included refinement of critical business
services and tolerances, ensuring these considerations are embedded as part of
day-to-day operations, together with enhancement of the Group's technology
• Climate change - Addressing the financial risks of climate change
through key risk driver assessments, and consideration of the impacts of the
wider ESG agenda across the Group's operations
• IRB - Continuing to develop IRB model methodologies across our
buy-to-let and PDF portfolios and embed the overarching model risk framework
to enhance credit risk management and support the Group's IRB application
process. Phase 2 of the buy-to-let application was submitted to the PRA in
March 2021 and PRA interviews are ongoing. Significant progress has been made
on Phase 3 documentation for buy-to-let and Phase 2 documentation for
development finance.
• Outsourcing and suppliers - Continued evolution and further
embedding of the Group's approach to managing the risks and oversight of its
outsourced relationships and important suppliers
• Stress testing - Enhancing stress testing procedures within the
Group to ensure the robustness of capital and liquidity positions
• Cyber security - Ensuring that the Group's cyber-security controls
and data protection approach continue to remain effective in the face of the
rapidly evolving challenges in these areas and the current geopolitical risks
arising from the conflict in Ukraine
Overall the level of regulatory compliance standards impacting the Group
continues to increase, and it is committed to ensuring it remains compliant in
all areas of its business, with particular focus on continuing to strengthen
financial crime systems and controls, which have been an area of regulatory
focus across the sector. Given the importance of ensuring that the Group's
financial crime risk mitigation framework remains robust, a comprehensive
programme of work has and continues to be undertaken in this area. The
implementation of an enhanced anti-money laundering programme has resulted in
widespread activity, with significant technological advancements and financial
investments being made. Financial crime expertise has also been uplifted
with recruitment into both first and second line functions.
Principal risks and uncertainties
A summary of the principal risks and uncertainties faced by the Group,
required by DTR 4.2.7(2) of the Disclosure and Transparency Rules, is set out
on pages 158 to 163. These risks have not changed significantly since those
disclosed at the 2021 year end.
6.6 REGULATORY CHANGES
Paragon Bank, which, for regulatory purposes, includes most of the Group's
activities, is authorised by the PRA and regulated by the PRA and the FCA. The
Group is subject to consolidated supervision by the PRA and a number of its
subsidiaries are authorised and regulated by the FCA. As a result, current and
projected regulatory changes, particularly the ongoing programme of revisions
to the Basel supervisory regime, continue to pose a significant risk for the
Group, both as a result of their impact and of the pace of change.
The governance and control structures within the Group provide a robust
mechanism to ensure that the impacts of all new regulatory requirements on the
business are clearly understood and that appropriate preparations are made
before implementation. Regular reports on key regulatory developments are
received at both executive and board risk committees, assessing the potential
implications for the Group, along with necessary actions.
Whilst the impact of Covid has largely driven the regulatory priorities since
2020, the Group is affected by a broad range of prudential and conduct
regulations, given the nature of its operations. The Group therefore engages
in regular dialogue with its regulators and continues to respond to regulatory
requests in a timely fashion, focussing controls on the delivery of fair
customer outcomes.
The following recent and current developments have the greatest potential
impact on the Group:
· Consumer Duty - The FCA issued draft rules relating to the 'Consumer
Duty' in December 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 support and price and value.
The Group has initiated a programme of activity to prepare for the final rules
and implementation in 2023
· Vulnerable customers - The treatment of vulnerable customers
continues to be a strong focus for the FCA, further supported by the Consumer
Duty proposals. 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, and to enhance management information and analysis in
relation to drivers of vulnerability
· Operational resilience - Good progress continues to be made in
developing and enhancing operational resilience capability across the Group
following the publication of the final rules and guidance on this area in
2021. The Group has met the 2022 policy implementation deadline including
identifying important business services, setting impact tolerances and
embedding a scenario testing approach
The Group's first self-assessment has been through governance and fully
approved by the Board. Focus is now on continuous improvement of the
resilience approach and ongoing assessment of vulnerabilities
· Climate change - The Group continues to work towards embedding its
approach to managing climate-related financial risks in line with the PRA
expectations. Managing the impacts of climate change is seen as a key
strategic priority for the Group and climate risk considerations are embedded
within the Group's ERMF. During 2021 the PRA published a report setting out
its intention to begin supervision of climate related financial risks in
2022
In response to supervisory expectations, the Group's 2022 ICAAP has considered
the impact of climate change under a number of scenarios to ensure the Group
is adequately capitalised. As the regulatory and wider requirements
surrounding climate change risk continue to develop, the Group's approach will
evolve to reflect emerging good practice in a manner that is proportionate to
its climate exposure
· MREL - The Bank of England published a Statement of Policy ('SoP') in
December 2021 setting out its expectation on MREL, taking effect from 1
January 2022. Although the Group does not have an MREL requirement currently
as it is not a bail-in firm, this could be an area that impacts in future and
therefore continues to be closely monitored
The proposal included a longer transition period (extended from 3 years to 6),
a 3-year notice period ahead of transition and the possible use of a 2-year
flexible add-on. Additionally, the SoP has amended the transition glide path
with the Bank of England now offering the possibility of using a two-step
glide path
The consultation process for the incorporation of the prudential regulation
regime previously set out in European legislation into UK law and regulation
following Brexit continues to progress. While the expectation is that the
majority of requirements will be directly transcribed, the PRA has indicated
its willingness to depart from the EU text where it believes such a departure
would enhance regulatory oversight in the UK. The Group will continue to
monitor this process and respond as appropriate.
The Board and Executive Committee receive regular briefings on the progress of
all these initiatives and overall, the Group considers it is well placed to
respond to upcoming regulatory developments and ensure compliance in line with
required timescales.
Statement of Directors' Responsibilities
The directors confirm that, to the best of their knowledge:
· The condensed financial statements have been prepared in accordance
with International Accounting Standard 34 - 'Interim Financial Reporting',
issued by the IASB and as contained in UK adopted IFRS
· The Interim Management Report includes a fair review of the
information required by Section 4.2.7R of the Disclosure Guidance and
Transparency Rules, issued by the Financial Conduct Authority (that being an
indication of important events that have occurred during the first six months
of the current financial year and their impact on the condensed financial
statements and a description of the principal risks and uncertainties for the
remaining six months of the financial year)
· The Interim Management Report includes a fair review of the
information required by Section 4.2.8R of the Disclosure Guidance and
Transparency Rules, issued by the Financial Conduct Authority (that being
disclosure of related party transactions that have taken place in the first
six months of the current financial year and that have materially affected the
financial position or the performance of the enterprise during that period;
and any changes in the related party transactions described in the last annual
report which could do so)
Approved by the Board of Directors and signed on behalf of the Board as the
persons responsible within the Company.
MARIUS VAN NIEKERK
Company Secretary
14 June 2022
Board of Directors
F J Clutterbuck H R Tudor
(Chair of the Board) (Non-executive director, Chair of the Remuneration Committee and Senior
Independent Director)
B A Ridpath G H Yorston
(Non-executive director) (Non-executive director)
A C M Morris P A Hill
(Non-executive director and Chair of the Audit Committee) (Non-executive director and Chair of the Risk and Compliance Committee)
N S Terrington R J Woodman
(Chief Executive Officer) (Chief Financial Officer)
INDEPENDENT REVIEW REPORT TO PARAGON BANKING GROUP PLC
Conclusion
We have been engaged by the Company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 31
March 2022 which comprises consolidated statement of profit or loss,
consolidated statement of comprehensive income, consolidated balance sheet,
consolidated cash flow statement, consolidated statement of movements in
equity and the related explanatory notes.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 31 March 2022 is not prepared, in
all material respects, in accordance with IAS 34 Interim Financial Reporting
as adopted for use in the UK and the Disclosure Guidance and Transparency
Rules ('the DTR') of the UK's Financial Conduct Authority ('the UK FCA').
Scope of review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410 Review of Interim Financial Information
Performed by the Independent Auditor of the Entity issued by the Auditing
Practices Board for use in the UK. A review of interim financial information
consists of making enquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review procedures.
We read the other information contained in the half-yearly financial report
and consider whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed set of
financial statements.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and consequently does not enable
us to obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not express an audit
opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing the
half-yearly financial report in accordance with the DTR of the UK FCA.
As disclosed in note 28, the latest annual financial statements of the Group
were prepared in accordance with International Financial Reporting Standards
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European
Union and in accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006 and the next annual financial
statements will be prepared in accordance with UK-adopted international
accounting standards. The directors are responsible for preparing the
condensed set of financial statements included in the half-yearly financial
report in accordance with IAS 34 as adopted for use in the UK.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on our
review.
The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the Company in accordance with the terms of our
engagement to assist the Company in meeting the requirements of the DTR of the
UK FCA. Our review has been undertaken so that we might state to the Company
those matters we are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company for our review work, for this
report, or for the conclusions we have reached.
Simon Ryder for and on behalf of KPMG LLP
Chartered Accountants
66 Queen Square
Bristol
BS1 4BE
14 June 2022
CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
For the six months ended 31 March 2022 (Unaudited)
Note Six months to Six months to Year to
31 March 31 March 30 September 2021
2022 2021
£m £m £m
Interest receivable 3 254.7 238.6 484.2
Interest payable and similar charges 4 (79.5) (91.1) (173.7)
Net interest income 175.2 147.5 310.5
Other leasing income 11.8 9.6 20.4
Related costs (9.7) (8.5) (16.9)
Net leasing income 2.1 1.1 3.5
Other income 5 4.4 6.1 10.9
Other operating income 6.5 7.2 14.4
Total operating income 181.7 154.7 324.9
Operating expenses (74.9) (65.8) (135.4)
Provisions for losses 11 (1.3) (6.0) 4.7
Operating profit before fair value items 105.5 82.9 194.2
Fair value net gains 6 38.1 13.5 19.5
Operating profit being profit on ordinary activities before taxation 213.7
143.6 96.4
Tax charge on profit on ordinary activities (49.2)
7 (34.5) (22.2)
Profit on ordinary activities after taxation 164.5
109.1 74.2
Note Six months to Six months to Year to
31 March 31 March 30 September 2021
2022 2021
Basic earnings per share 8 44.4p 29.3p 65.2p
Diluted earnings per share 8 43.0p 28.3p 63.0p
Dividend - rate per share for the period 21 9.4p 7.2p 26.1p
The results for the periods shown above relate entirely to continuing
operations.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the six months ended 31 March 2022 (Unaudited)
Note Six months to Six months to Year to
31 March 31 March 30 September 2021
2022 2021
£m £m £m
Profit for the period 109.1 74.2 164.5
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Actuarial gain on pension scheme 17 13.7 7.8 8.2
Tax thereon (3.1) (1.5) (0.9)
10.6 6.3 7.3
Items that may be reclassified subsequently to profit or loss
Cash flow hedge (losses) taken to equity - (2.9) (3.0)
Tax thereon - 0.6 0.5
- (2.3) (2.5)
Other comprehensive income for the period net of tax 4.8
10.6 4.0
Total comprehensive income for the period 169.3
119.7 78.2
CONSOLIDATED BALANCE SHEET
31 March 2022 (Unaudited)
31 March 31 March 30 September 2021 30 September
2022 2021 2020
Note £m £m £m £m
Assets
Cash - central banks 9 1,265.7 1,832.3 1,142.0 1,637.1
Cash - retail banks 9 234.7 270.7 218.1 287.9
Loans to customers 10 13,763.4 12,874.4 13,408.2 12,741.1
Derivative financial assets 12 201.7 180.7 44.2 463.3
Sundry assets 36.4 88.8 69.2 128.0
Current tax assets 0.7 3.0 - 5.7
Deferred tax assets - 3.7 14.4 6.2
Retirement benefit obligations 17 4.4 - - -
Property, plant and equipment 73.9 64.7 70.4 66.1
Intangible assets 13 170.1 170.5 170.5 170.1
Total assets 15,751.0 15,488.8 15,137.0 15,505.5
Liabilities
Short-term bank borrowings 0.4 0.1 0.3 0.4
Retail deposits 14 9,822.8 8,634.3 9,297.4 7,867.0
Derivative financial liabilities 12 32.5 76.2 43.9 132.4
Asset backed loan notes 15 477.1 2,011.3 516.0 3,270.5
Secured bank borrowings 15 871.3 755.7 730.0 657.8
Retail bond issuance 15 112.2 237.0 237.1 296.8
Corporate bond issuance 15 149.1 168.3 149.0 149.8
Central bank facilities 15 2,850.0 2,244.4 2,819.0 1,854.4
Repurchase agreements 15 - 50.0 - -
Sundry liabilities 16 155.8 95.9 90.7 100.0
Current tax liabilities - - 1.4 -
Deferred tax liabilities 0.1 - - -
Retirement benefit obligations 17 - 11.8 10.3 20.4
Total liabilities 14,471.3 14,285.0 13,895.1 14,349.5
Called-up share capital 18 250.5 262.0 262.5 261.8
Reserves 19 1,075.8 976.9 1,056.1 932.0
Own shares 20 (46.6) (35.1) (76.7) (37.8)
Total equity 1,279.7 1,203.8 1,241.9 1,156.0
Total liabilities and equity 15,751.0 15,488.8 15,137.0 15,505.5
The condensed financial statements for the half year were approved by the
Board of Directors on 14 June 2022.
CONSOLIDATED CASH FLOW STATEMENT
For the six months ended 31 March 2022 (Unaudited)
Note Six months to Six months to Year to
31 March 31 March 30 September 2021
2022 2021
£m £m £m
Net cash flow generated by operating activities 878.1
22 221.1 691.7
Net cash (utilised) by investing activities 23 (1.2) (2.3) (4.3)
Net cash (utilised) by financing activities (1,438.6)
24 (79.7) (511.1)
Net increase / (decrease) in cash and cash equivalents (564.8)
140.2 178.3
Opening cash and cash equivalents 1,359.8 1,924.6 1,924.6
Closing cash and cash equivalents 1,500.0 2,102.9 1,359.8
Represented by balances within
Cash 9 1,500.4 2,103.0 1,360.1
Short-term bank borrowings (0.4) (0.1) (0.3)
1,500.0 2,102.9 1,359.8
CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY
For the six months ended 31 March 2022 (Unaudited)
Six months ended 31 March 2022
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 period - - - - - 109.1 - 109. 1
Other comprehensive income - - - - - 10.6 - 10.6
Total comprehensive income - - - - - 119.7 - 119.7
Transactions with owners
Dividends paid (note 21) - - - - - (46.6) - (46.6)
Shares cancelled (12.1) - 12.1 - - (60.7) 60.7 -
Own shares purchased - - - - - - (39.7) (39.7)
Exercise of share awards 0.1 0.3 - - - (9.8) 9.1 (0.3)
Charge for share based remuneration - - - - - 4.4 - 4.4
Tax on share based remuneration - - - - - 0.3 - 0.3
Net movement in equity in the period (12.0) 0.3 12.1 - - 7.3 30.1 37.8
Opening equity 262.5 70.1 50.3 (70.2) - 1,005.9 (76.7) 1,241.9
Closing equity 250.5 70.4 62.4 (70.2) - 1,013.2 (46.6) 1,279.7
Six months ended 31 March 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 period - - - - - 74.2 - 74.2
Other comprehensive income - - - - (2.3) 6.3 - 4.0
Total comprehensive income - - - - (2.3) 80.5 - 78.2
Transactions with owners
Dividends paid (note 21) - - - - - (36.5) - (36.5)
Shares cancelled - - - - - - - -
Own shares purchased - - - - - - - -
Exercise of share awards 0.2 0.5 - - - (2.6) 2.7 0.8
Charge for share based remuneration - - - - - 4.4 - 4.4
Tax on share based remuneration - - - - - 0.9 - 0.9
Net movement in equity in the period 0.2 0.5 - - (2.3) 46.7 2.7 47.8
Opening equity 261.8 68.7 50.3 (70.2) 2.5 880.7 (37.8) 1,156.0
Closing equity 262.0 69.2 50.3 (70.2) 0.2 927.4 (35.1) 1,203.8
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)
Shares cancelled - - - - - - - -
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
Paragon Banking Group PLC
CONDENSED FINANCIAL STATEMENTS
SELECTED NOTES TO THE ACCOUNTS
For the six months ended 31 March 2022 (Unaudited)
1. GENERAL INFORMATION
The condensed financial statements are prepared for Paragon Banking Group PLC
('the Company') and its subsidiary companies (together 'the Group') on a
consolidated basis.
The condensed financial statements for the six months ended 31 March 2022 and
for the six months ended 31 March 2021 have not been audited, as defined in
section 434 of the Companies Act 2006.
The figures shown above for the year ended 30 September 2021 and the year
ended 30 September 2020 are not statutory accounts. A copy of the statutory
accounts for the year has been delivered to the Registrar of Companies. The
auditors reported on those statutory accounts and their report was
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.
This half-yearly financial report is also available on the Group's website at
www.paragonbankinggroup.co.uk. As previously advised, the half-yearly
financial report is available online only, to help to reduce the environmental
impact of shareholder communication.
The remaining notes to the accounts are organised in to three sections:
· Analysis - providing further analysis and information on the amounts
shown in the primary financial statements
· 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 condensed
financial statements
SELECTED NOTES TO THE ACCOUNTS - ANALYSIS
For the six months ended 31 March 2022 (Unaudited)
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 information
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.
Other assets are not allocated between segments.
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.
Following the agreement for the sale of Idem Capital assets described in note
10, concluded after the end of the period, the Group intends to review its
segments for future disclosure, given the relatively small size of the ongoing
Idem Capital segment compared to the two other divisions.
Financial information about these business segments, prepared on the same
basis as used in the consolidated accounts of the Group, is shown below.
Six months ended 31 March 2022
Mortgage Lending Commercial Lending Idem Unallocated items Total
Capital
£m £m £m £m £m
Interest receivable 180.9 62.9 9.1 1.8 254.7
Interest payable (58.8) (9.0) (0.8) (10.9) (79.5)
Net interest income 122.1 53.9 8.3 (9.1) 175.2
Other operating income 2.8 3.7 - - 6.5
Total operating income 124.9 57.6 8.3 (9.1) 181.7
Operating expenses (9.3) (12.8) (2.6) (50.2) (74.9)
Provisions for losses 1.0 (3.2) 0.9 - (1.3)
116.6 41.6 6.6 (59.3) 105.5
Six months ended 31 March 2021
Mortgage Commercial Lending Idem Unallocated items Total
Lending Capital
£m £m £m £m £m
Interest receivable 168.4 57.1 12.3 0.8 238.6
Interest payable (65.3) (10.6) (1.5) (13.7) (91.1)
Net interest income 103.1 46.5 10.8 (12.9) 147.5
Other operating income 2.9 4.1 0.2 - 7.2
Total operating income 106.0 50.6 11.0 (12.9) 154.7
Operating expenses (8.7) (11.7) (2.5) (42.9) (65.8)
Provisions for losses (4.9) (1.3) 0.2 - (6.0)
92.4 37.6 8.7 (55.8) 82.9
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
Direct costs (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
The segmental profits disclosed above reconcile to the consolidated results as
set out below.
31 March 31 March 30 September
2022 2021 2021
£m £m £m
Results shown above 105.5 82.9 194.2
Fair value items 38.1 13.5 19.5
Operating profit 143.6 96.4 213.7
The assets of the segments were:
31 March 31 March 30 September 2021 30 September
2022 2021 2020
£m £m £m £m
Mortgage Lending 12,155.9 11,490.8 11,732.0 11,488.2
Commercial Lending 1,762.5 1,466.0 1,608.1 1,554.3
Idem Capital 196.0 258.6 225.2 297.1
Total segment assets 14,114.4 13,215.4 13,565.3 13,339.6
Unallocated assets 1,636.6 2,273.4 1,571.7 2,165.9
Total assets 15,751.0 15,488.8 15,137.0 15,505.5
An analysis of the Group's loan assets by type and segment is shown in note
10.
3. INTEREST RECEIVABLE
31 March 31 March 2021 30 September 2021
2022
£m £m £m
Interest receivable in respect of
Loans and receivables 229.9 216.6 440.0
Finance leases 21.5 20.1 40.4
Factoring income 1.5 1.1 2.3
Interest on loans to customers 252.9 237.8 482.7
Other interest receivable 1.8 0.8 1.5
Total interest on financial assets 254.7 238.6 484.2
The above interest arises from:
31 March 31 March 2021 30 September 2021
2022
£m £m £m
Financial assets held at amortised cost 233.2 218.5 443.8
Finance leases 21.5 20.1 40.4
254.7 238.6 484.2
4. INTEREST PAYABLE AND SIMILAR CHARGES
31 March 31 March 2021 30 September 2021
2022
£m £m £m
On retail deposits 55.4 63.1 120.5
On asset backed loan notes 5.5 10.0 17.9
On bank loans and overdrafts 5.0 3.8 6.6
On corporate bonds 3.3 5.4 9.3
On retail bonds 5.8 8.2 15.4
On central bank facilities 4.0 0.9 2.2
On repurchase agreements - - 0.1
Total interest on financial liabilities 79.0 91.4 172.0
On pension scheme deficit (note 17) 0.1 0.2 0.3
Discounting on contingent consideration - 0.1 0.3
Discounting on lease liabilities 0.1 0.1 0.2
Other finance costs 0.3 (0.7) 0.9
79.5 91.1 173.7
All interest payable on financial liabilities relates to financial liabilities
carried at amortised cost.
5. other incOme
31 March 31 March 2021 30 September 2021
2022
£m £m £m
Loan account fee income 2.2 2.8 5.1
Broker commissions 1.1 1.0 1.9
Third party servicing 0.9 2.1 3.5
Other income 0.2 0.2 0.4
4.4 6.1 10.9
All loan account fee income arises from financial assets held at amortised
cost.
6. FAIR VALUE NET GAINS
31 March 31 March 2021 30 September 2021
2022
£m £m £m
Ineffectiveness of fair value hedges (note 12)
Portfolio hedges of interest rate risk
Deposit hedge 1.6 (0.2) (0.3)
Loan hedge 10.4 3.9 6.6
12.0 3.7 6.3
Ineffectiveness of cash flow hedges - - -
Other hedging movements 1.2 6.7 9.9
Net gains / (losses) on other derivatives 24.9 3.1 3.3
38.1 13.5 19.5
The fair value net gain / (loss) represents the accounting volatility on
derivative instruments which are matching risk exposure 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.
The impact of hedging arrangements on the Group's balance sheet is summarised
in note 12 and a full description of the Group's use of derivative financial
instruments for hedging purposes is set out in note 19 to the financial
statements for the year ended 30 September 2021.
7. TAX CHARGE ON PROFIT ON ORDINARY ACTIVITIES
The Group's income tax charge for the six months ended 31 March 2022
represents an effective rate of 24.0% (six months ended 31 March 2021:
23.0%, year ended 30 September 2021: 23.0%). This is based on the Group's best
estimate of the annual effective rate of income tax expected for the full year
ending 30 September 2022, derived UK statutory rates, applied to the pre-tax
income of the period.
The standard rate of corporation tax in the UK applicable to the Group in the
period was 19% (2021 H1: 19.0%), based on currently enacted legislation.
During the year ended 30 September 2021, the UK Government enacted legislation
increasing the standard rate of corporation tax in the UK from 19.0% to 25.0%
from April 2023. This will increase the standard rate of corporation tax
applicable to the Group to 22.0% in the year ending 30 September 2023 and to
25.0% in the year ending 30 September 2024 and thereafter. The effect of these
changes on deferred tax balances was accounted for in the year ended 30
September 2021.
In the current financial year the UK Government enacted legislation reducing
the rate of the Banking Surcharge from 8.0% to 3.0%, also from April 2023,
while increasing the profit threshold at which the surcharge applies to
£100.0m from £25.0m. The impact of this change on deferred tax balances has
been accounted for in the current period.
8. EARNINGS PER SHARE
Earnings per ordinary share is calculated as follows:
31 March 31 March 30 September 2021
2022 2021
Profit for the period (£m) 109.1 74.2 164.5
Basic weighted average number of ordinary shares ranking for dividend during 252.3
the period (m)
245.7 253.3
Dilutive effect of the weighted average number of share options and incentive 8.9
plans in issue during the period (m)
8.2 8.8
Diluted weighted average number of ordinary shares ranking for dividend during 261.2
the period (m)
253.9 262.1
Earnings per ordinary share - basic 44.4p 29.3p 65.2p
43.0p 28.3p 63.0p
- diluted
9. CASH and cash equivalents
31 March 31 March 30 September 30 September 2020
2022 2021 2021
£m £m £m £m
Balances with central banks 1,265.7 1,832.3 1,142.0 1,637.1
Balances with other banks 234.7 270.7 218.1 287.9
1,500.4 2,103.0 1,360.1 1,925.0
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. This cash is shown as 'securitisation
cash' below.
Cash held by the Trustees of the Paragon Employee Share Ownership Plans may
only be used to invest in the shares of the Company, pursuant to the aims of
those plans. This is shown as 'ESOP cash' below.
The total 'Cash and Cash Equivalents' balance may be analysed as shown below.
31 March 31 March 30 September 30 September 2020
2022 2021 2021
£m £m £m £m
Available cash 1,342.4 1,895.1 1,236.5 1,701.1
Securitisation cash 156.7 207.2 123.3 223.4
ESOP cash 1.3 0.7 0.3 0.5
1,500.4 2,103.0 1,360.1 1,925.0
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
31 March 31 March 30 September 30 September
2022 2021 2021 2020
£m £m £m £m
Loans to customers 13,914.9 12,816.3 13,402.7 12,631.4
Fair value adjustments from portfolio hedging (note 12) 5.5
(151.5) 58.1 109.7
13,763.4 12,874.4 13,408.2 12,741.1
The Group's loan assets at 31 March 2022, analysed between the segments
described in note 2, are set out below.
Mortgage Commercial Lending Idem Total
Capital
Lending
£m £m £m £m
At 31 March 2022
First mortgages 11,874.7 - - 11,874.7
Consumer loans 124.5 - 194.2 318.7
Motor finance - 236.2 1.8 238.0
Asset finance - 457.0 - 457.0
Development finance - 672.9 - 672.9
Other commercial loans - 353.6 - 353.6
Loans to customers 11,999.2 1,719.7 196.0 13,914.9
At 31 March 2021
First mortgages 10,962.0 - - 10,962.0
Consumer loans 168.6 - 249.7 418.3
Motor finance - 220.4 8.9 229.3
Asset finance - 467.8 - 467.8
Development finance - 552.3 - 552.3
Other commercial loans - 186.6 - 186.6
Loans to customers 11,130.6 1,427.1 258.6 12,816.3
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
On 8 June 2022, after the end of the period, the Group entered into an
agreement to dispose of unsecured consumer loan assets from its Idem Capital
division with a carrying value at 31 March 2022 of £76.8m. The final value of
the transaction will be determined in the second half of the financial year,
based on the position at the closure of the deal, but a small profit is
expected. More information on this transaction will be given with the Group's
year end results.
11. Impairment provision on loans to customers
Provisioning approach
IFRS 9 requires that impairment is evaluated on an expected credit loss
('ECL') basis. ECLs are based on an assessment of the probability of default
('PD') and loss given default ('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. Provision may be based on either
twelve month or lifetime ECL, dependant on whether an account has experienced
a significant increase in credit risk ('SICR').
The Group's approach to impairment provision on loans to customers, in
accordance with IFRS 9, is set out in detail in note 18 to the annual
accounts. This includes an outline of the calculations used and a definition
of terms, and the information in this half year report should be read in
conjunction with it.
There have been no significant changes in overall approach since the 2021 year
end. At that time, as discussed in the 2021 annual accounts, it was necessary
for the Group to depart from its normal provisioning methodology due to the
impact of the Covid crisis, both on the Group's customers and on the metrics
used to determine credit quality. The continuing uncertainties surrounding
the long term impact of the pandemic, combined with increasing pressures on
the UK economy from increases in interest rates, inflation and the cost of
living more widely, and the economic risks to the UK inherent in the current
conflict in Ukraine, mean that the Group has taken a broadly similar approach
in determining provision at 31 March 2022.
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.
While the immediate economic effects of the Covid pandemic have largely
receded, the extent of the underlying long-term damage done to the financial
situations of consumers and businesses, so-called Covid scarring, is not yet
clear. Neither are such effects necessarily observable, as yet, from either
internal or external credit data. Such scarring might be indicative of an SICR
on a customer's account, and hence the Group has to carefully consider, using
all data available to it, whether any such SICR accounts exist, other than
those identified through the normal 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 buy-to-let customers who have been granted extended payment
reliefs have been placed in Stage 2, regardless of other indicators.
The effect of this override is to transfer accounts with gross balances of
£548.9m (31 March 2021: £661.2m, 30 September 2021: £599.8m) to Stage 2.
The additional provision on transfer is included within PMAs.
This overall approach remains broadly consistent with that taken at 30
September 2021. In reviewing account performance during the current period 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.
Post Model Adjustments ('PMA's)
In order to ensure that its loan portfolios are adequately provisioned, the
Group considers whether there are factors not fully captured by the modelling
process, including economic conditions more generally, which indicate a need
for PMAs. Information considered includes credit data, customer and broker
feedback received, the results of insight surveys, industry intelligence and
expert knowledge within the business lines.
In the six month period, the dominance of Covid in these considerations
reduced as the short-term impact of the pandemic receded and other economic
factors such as the UK cost of living, rising interest rates and the conflict
in the Ukraine became more significant.
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 limited or non-existent, as
with Covid or the potential for a high inflation, high interest rate economic
climate, some form of PMA is likely to be necessary. While high interest rate
and inflation scenarios have occurred in the UK in the past, market
conditions, products and regulatory expectations have moved on considerably in
the meantime, and most such observations would pre-date the existence of
buy-to-let mortgages as a distinct asset class.
The current model behaviour and the potential for unobserved credit issues
have meant that the requirement for such adjustments over recent periods has
been 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.
31 March 2022 31 March 2021 30 September 2021
£m £m £m
Mortgage Lending 7.8 19.2 8.9
Commercial Lending 6.3 7.3 10.2
Idem Capital - 1.0 0.3
14.1 27.5 19.4
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 across the Group's major portfolios 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.
Impairment 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 a SICR (Stage 2); and
loans which are impaired (Stage 3).
· On initial recognition, and for assets where there has not been an
SICR, provisions are 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 are made based on the ECLs over
the full life of the loan
· For credit impaired assets, provisions are made on the basis of
lifetime ECLs
For assets which are 'Purchased or Originated as Credit Impaired' ('POCI')
accounts (i.e. 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
31 March 2022
Gross loan book
Mortgage Lending 10,379.0 1,520.7 120.2 12.0 12,031.9
Commercial Lending 1,689.9 34.3 9.3 6.7 1,740.2
Idem Capital 78.9 5.9 23.0 90.2 198.0
Total 12,147.8 1,560.9 152.5 108.9 13,970.1
Impairment provision
Mortgage Lending (5.4) (5.5) (21.8) - (32.7)
Commercial Lending (14.9) (0.8) (4.4) (0.4) (20.5)
Idem Capital - (0.1) (1.9) - (2.0)
Total (20.3) (6.4) (28.1) (0.4) (55.2)
Net loan book
Mortgage Lending 10,373.6 1,515.2 98.4 12.0 11,999.2
Commercial Lending 1,675.0 33.5 4.9 6.3 1,719.7
Idem Capital 78.9 5.8 21.1 90.2 196.0
Total 12,127.5 1,554.5 124.4 108.5 13,914.9
Coverage ratio
Mortgage Lending 0.05% 0.36% 18.14% - 0.27%
Commercial Lending 0.88% 2.33% 47.31% 5.97% 1.18%
Idem Capital - 1.69% 8.26% - 1.01%
Total 0.17% 0.41% 18.43% 0.37% 0.40%
* Stage 2 and 3 balances are analysed in more detail below.
Stage 1 Stage 2 * Stage 3 * POCI Total
£m £m £m £m £m
31 March 2021
Gross loan book
Mortgage Lending 10,063.9 980.0 121.3 14.0 11,179.2
Commercial Lending 1,352.0 79.8 17.7 6.7 1,456.2
Idem Capital 107.2 7.4 27.7 121.0 263.3
Total 11,523.1 1,067.2 166.7 141.7 12,898.7
Impairment provision
Mortgage Lending (4.5) (16.0) (28.1) - (48.6)
Commercial Lending (17.3) (2.7) (8.7) (0.4) (29.1)
Idem Capital (0.2) (0.3) (4.2) - (4.7)
Total (22.0) (19.0) (41.0) (0.4) (82.4)
Net loan book
Mortgage Lending 10,059.4 964.0 93.2 14.0 11,130.6
Commercial Lending 1,334.7 77.1 9.0 6.3 1,427.1
Idem Capital 107.0 7.1 23.5 121.0 258.6
Total 11,501.1 1,048.2 125.7 141.3 12,816.3
Coverage ratio
Mortgage Lending 0.04% 1.63% 23.17% - 0.43%
Commercial Lending 1.28% 3.38% 49.15% 5.97% 2.00%
Idem Capital 0.19% 4.05% 15.16% - 1.79%
Total 0.19% 1.78% 24.60% 0.28% 0.64%
* 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 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.
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 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.
In all cases accounts which are more than one month in arrears, where this is
a meaningful measure, are considered to have an SICR. However, in certain loan
portfolios, regular monthly payments of pre-set amounts are not required and
hence this criterion cannot be used.
The value of accounts in Stage 2 as a result of arrears is broadly similar to
that at 30 September 2021 across all segments. The more negative economic
outlook has caused an increased number of non-arrears accounts to be
identified as having an SICR in the Mortgage Lending division. However, the
impact of house price inflation means that the growth in gross Stage 2 assets
is not matched by growth in provision, and the coverage ratios have reduced.
Stage 2 non-arrears accounts in Consumer Lending have fallen significantly
though, principally as a result of improvements in the performance of
development finance accounts against project plans. This has decreased the
average security value of Commercial Lending Stage 2 cases and increased the
required coverage.
In the Idem Capital division, Stage 2 assets and provision levels are broadly
similar to those at 30 September 2021.
< 1 month Recent > 1 <= 3 months arrears Total
arrears
arrears
£m £m £m £m
31 March 2022
Gross loan book
Mortgage Lending 1,498.4 6.9 15.4 1,520.7
Commercial Lending 29.3 1.3 3.7 34.3
Idem Capital 3.1 0.6 2.2 5.9
Total 1,530.8 8.8 21.3 1,560.9
Impairment provision
Mortgage Lending (5.3) - (0.2) (5.5)
Commercial Lending (0.6) - (0.2) (0.8)
Idem Capital - - (0.1) (0.1)
Total (5.9) - (0.5) (6.4)
Net loan book
Mortgage Lending 1,493.1 6.9 15.2 1,515.2
Commercial Lending 28.7 1.3 3.5 33.5
Idem Capital 3.1 0.6 2.1 5.8
Total 1,524.9 8.8 20.8 1,554.5
Coverage ratio
Mortgage Lending 0.35% - 1.30% 0.36%
Commercial Lending 2.05% - 5.41% 2.33%
Idem Capital - - 4.55% 1.69%
Total 0.39% - 2.35% 0.41%
< 1 month Recent > 1 <= 3 months arrears Total
arrears
arrears
£m £m £m £m
31 March 2021
Gross loan book
Mortgage Lending 948.2 12.7 19.1 980.0
Commercial Lending 73.6 1.6 4.6 79.8
Idem Capital 3.4 0.8 3.2 7.4
Total 1,025.2 15.1 26.9 1,067.2
Impairment provision
Mortgage Lending (15.1) (0.6) (0.3) (16.0)
Commercial Lending (2.2) - (0.5) (2.7)
Idem Capital (0.1) - (0.2) (0.3)
Total (17.4) (0.6) (1.0) (19.0)
Net loan book
Mortgage Lending 933.1 12.1 18.8 964.0
Commercial Lending 71.4 1.6 4.1 77.1
Idem Capital 3.3 0.8 3.0 7.1
Total 1,007.8 14.5 25.9 1,048.2
Coverage ratio
Mortgage Lending 1.59% 4.72% 1.57% 1.63%
Commercial Lending 2.99% - 10.87% 3.38%
Idem Capital 2.94% - 6.25% 4.05%
Total 1.70% 3.97% 3.72% 1.78%
< 1 month Recent > 1 <= 3 months arrears Total
arrears
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 1.47% - 1.96% 1.51%
Idem Capital - - 3.70% 1.59%
Total 0.86% 1.12% 1.87% 0.88%
The Group uses arrears multiples as a proxy for days past due, as this measure
is commonly used in its arrears reporting. A loan will generally be one month
in arrears from the point it is one day past due until it is thirty days past
due.
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.
RoR accounts in Stage 3 may be fully up-to-date with full recovery possible.
These accounts are included in Stage 3 as they are classified as defaulted
for regulatory purposes.
The gross values of Stage 3 accounts at 31 March 2022 are broadly similar to
those at 30 September 2021, except for write-offs of large exposures in the
Commercial Lending division which had been fully provided at the year end.
These balances were included in the 'arrears > 3 months' category at 30
September 2021.
Other than the impact of the Commercial Lending write-offs, coverage levels
remained broadly similar to the year end position. Ratios in Stage 3 will
naturally be subject to a wider range of fluctuation than those elsewhere,
given the low number of accounts involved, the consequent potential for mix
effects and the idiosyncratic nature of some of the cases.
Probation > 3 month arrears RoR managed Realisations Total
£m £m £m £m £m
31 March 2022
Gross loan book
Mortgage Lending 9.1 19.8 74.3 17.0 120.2
Commercial Lending 1.1 2.3 - 5.9 9.3
Idem Capital 0.4 20.0 - 2.6 23.0
Total 10.6 42.1 74.3 25.5 152.5
Impairment provision
Mortgage Lending - (0.3) (16.2) (5.3) (21.8)
Commercial Lending (0.3) (1.4) - (2.7) (4.4)
Idem Capital - (0.7) - (1.2) (1.9)
Total (0.3) (2.4) (16.2) (9.2) (28.1)
Net loan book
Mortgage Lending 9.1 19.5 58.1 11.7 98.4
Commercial Lending 0.8 0.9 - 3.2 4.9
Idem Capital 0.4 19.3 - 1.4 21.1
Total 10.3 39.7 58.1 16.3 124.4
Coverage ratio
Mortgage Lending - 1.52% 21.80% 31.18% 18.14%
Commercial Lending 27.27% 60.87% - 45.76% 47.31%
Idem Capital - 3.50% - 46.15% 8.26%
Total 2.83% 5.70% 21.80% 36.08% 18.43%
Probation > 3 month arrears RoR managed Realisations Total
£m £m £m £m £m
31 March 2021
Gross loan book
Mortgage Lending 3.3 23.1 81.3 13.6 121.3
Commercial Lending 1.3 6.9 - 9.5 17.7
Idem Capital 1.1 23.3 - 3.3 27.7
Total 5.7 53.3 81.3 26.4 166.7
Impairment provision
Mortgage Lending (0.2) (2.1) (20.4) (5.4) (28.1)
Commercial Lending (0.5) (3.3) - (4.9) (8.7)
Idem Capital - (2.6) - (1.6) (4.2)
Total (0.7) (8.0) (20.4) (11.9) (41.0)
Net loan book
Mortgage Lending 3.1 21.0 60.9 8.2 93.2
Commercial Lending 0.8 3.6 - 4.6 9.0
Idem Capital 1.1 20.7 - 1.7 23.5
Total 5.0 45.3 60.9 14.5 125.7
Coverage ratio
Mortgage Lending 6.06% 9.09% 25.09% 39.71% 23.17%
Commercial Lending 38.46% 47.83% - 51.58% 49.15%
Idem Capital - 11.16% - 48.48% 15.16%
Total 12.28% 15.01% 25.09% 45.08% 24.60%
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%
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.
31 March 31 March 30 September
2022 2021 2021
£m £m £m
First mortgages 78.0 70.4 74.7
Second mortgages 14.7 17.2 15.4
Asset finance 2.3 4.4 4.7
Motor finance 1.8 1.9 2.0
96.8 93.9 96.8
The RoR managed accounts are being managed to ensure the optimal resolution
for landlords, tenants and lenders and have largely reached a long-term,
stable position, 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)
Where a buy-to-let mortgage customer in England or Wales falls into arrears on
their account the Group has the power to appoint a receiver of rent under the
Law of Property Act. The receiver will then manage the property on behalf of
the customer, collecting rents and remitting them to make payments on the
account. While the receiver has the power to sell the property, in many cases
they will operate it as a buy-to-let on at least a short to medium term basis,
potentially longer, depending on the individual circumstances of the case.
This causes less disruption to the tenants and may result in the mortgage
account returning to performing status and the property being handed back to
the customer.
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.
31 March 2022 31 March 2021 30 September 2021
Number £m Number £m Number £m
Managed accounts
Appointment date
2010 and earlier 313 52.7 350 59.1 333 56.3
2011 to 2013 52 8.5 64 10.7 56 9.1
2014 to 2016 19 2.6 27 3.9 24 3.3
2016 and later 74 10.5 46 7.6 86 12.2
Total managed accounts 458 74.3 487 81.3 499 80.9
Accounts in the process of realisation
100 14.9 69 13.1 54 10.2
558 89.2 556 94.4 553 91.1
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 accounts had a receiver of
rent in place at 31 March 2022 (31 March 2021: 1, 30 September 2021: none),
making a total of 558 (31 March 2021: 557, 30 September 2021: 553).
Movements in impairment provision
The movements in the impairment provision calculated under IFRS 9, analysed by
business segments, are set out below.
Mortgage Commercial Idem Total
Lending
Capital
Lending
£m £m £m £m
At 30 September 2021 34.8 27.7 2.9 65.4
Provided in period (1.0) 4.0 (0.6) 2.4
Amounts written off (1.1) (11.2) (0.3) (12.6)
At 31 March 2022 32.7 20.5 2.0 55.2
At 30 September 2020 48.3 28.6 4.9 81.8
Provided in period 4.9 1.8 - 6.7
Amounts written off (4.6) (1.3) (0.2) (6.1)
At 31 March 2021 48.6 29.1 4.7 82.4
At 30 September 2020 48.3 28.6 4.9 81.8
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
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 or credit for the period is amounts recovered on previously written off
accounts of £1.1m (31 March 2021: £0.7m, 30 September 2021: £1.6m).
A more detailed analysis of these movements by IFRS 9 stage on a consolidated
basis for the six months ended 31 March 2022, the six months ended 31 March
2021, and the year ended 30 September 2021 are set out below.
These tables, and the matching tables analysing movements in gross balances,
have been compiled by comparing opening and closing balances on each account
and analysing the movements between them.
Changes due to credit risk includes all changes in model parameters whether
related to account performance, external credit data or model assumptions,
including economic scenarios and weightings.
There have been no changes in models creating significant movements in
balances in the period.
Stage 1 Stage 2 Stage 3 POCI Total
£m £m £m £m £m
Loss allowance at 30 September 2021 15.0 11.3 38.9 0.2 65.4
New assets originated or purchased 6.6 - - - 6.6
Changes in loss allowance
Transfer to Stage 1 1.0 (0.8) (0.2) - -
Transfer to Stage 2 (0.7) 1.1 (0.4) - -
Transfer to Stage 3 (0.1) (0.5) 0.6 - -
Changes on stage transfer (0.9) 0.6 1.8 - 1.5
Changes due to credit risk (0.6) (5.3) - 0.2 (5.7)
Write offs - - (12.6) - (12.6)
Loss allowance at 31 March 2022 20.3 6.4 28.1 0.4 55.2
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 5.7 - - - 5.7
Changes in loss allowance
Transfer to Stage 1 3.6 (1.5) (2.1) - -
Transfer to Stage 2 (1.0) 2.0 (1.0) - -
Transfer to Stage 3 (0.1) (0.5) 0.6 - -
Changes on stage transfer (2.9) 1.8 4.9 - 3.8
Changes due to credit risk (5.5) 1.4 1.3 - (2.8)
Write offs - - (6.1) - (6.1)
Loss allowance at 31 March 2021 22.0 19.0 41.0 0.4 82.4
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 30 September 2021 15.0 11.3 38.9 0.2 65.4
During the six months ended 31 March 2022 the impairment allowance remained
relatively stable, due to the opposing effects of the easing of Covid-related
pressures on the UK economy and mounting concerns about the nation's economic
health more generally, with inflation and interest rates increasing and the
potential for impacts from the conflict in Ukraine.
The most significant upward movement in provisions came from new lending,
mostly impacting Stage 1 amounts. While the impact of increased PDs moved more
accounts from Stage 1 to Stage 2, as the effects of less benign economics
worked their way through the Group's models, increased security values,
particularly house prices, mitigated the impact of this on provision values.
The principal impact on Stage 3 provisions was from write-offs, mostly of
accounts in the Commercial Lending division identified as defaults at the 2021
year end.
The principal movements in the impairment provision in the year ended 30
September 2021, particularly in the second half 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 remained 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 had been granted payment holiday extensions in that year
than in the preceding year, this drove further transfer from Stage 1 to Stage
2. Transfers to Stage 3 reflected principally a small number of realisations
cases and other cases identified through credit review. Write offs largely
related to the realisation of already provided losses on cases being worked
out on a long-term basis.
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
Balances at 30 September 2021 11,900.4 1,279.1 164.3 124.3 13,468.1
New assets originated or purchased 1,432.3 - - - 1,432.3
Changes in staging
Transfer to Stage 1 124.6 (122.5) (2.1) - -
Transfer to Stage 2 (495.0) 501.2 (6.2) - -
Transfer to Stage 3 (13.8) (12.1) 25.9 - -
Redemptions and repayments (1,006.2) (111.8) (18.2) (30.8) (1,167.0)
Write offs - - (12.6) - (12.6)
Other changes 205.5 27.0 1.4 15.4 249.3
Balance at 31 March 2022 12,147.8 1,560.9 152.5 108.9 13,970.1
Loss allowance (20.3) (6.4) (28.1) (0.4) (55.2)
Carrying value 12,127.5 1,554.5 124.4 108.5 13,914.9
Stage 1 Stage 2 Stage 3 POCI Total
£m £m £m £m £m
Balances at 30 September 2020 11,329.7 1,045.4 176.1 162.0 12,713.2
New assets originated or purchased 1,079.1 - - - 1,079.1
Changes in staging
Transfer to Stage 1 116.9 (109.2) (7.7) - -
Transfer to Stage 2 (215.7) 223.0 (7.3) - -
Transfer to Stage 3 (18.3) (21.2) 39.5 - -
Redemptions and repayments (974.8) (89.2) (29.6) (29.0) (1,122.6)
Write offs - - (6.1) - (6.1)
Other changes 206.2 18.4 1.8 8.7 235.1
Balance at 31 March 2021 11,523.1 1,067.2 166.7 141.7 12,898.7
Loss allowance (22.0) (19.0) (41.0) (0.4) (82.4)
Carrying value 11,501.1 1,048.2 125.7 141.3 12,816.3
Stage 1 Stage 2 Stage 3 POCI Total
£m £m £m £m £m
Balances 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
Other changes includes interest and similar charges.
Economic impacts
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 March
2022 forecasting cycle (the 'April reforecast') the Group has adopted a
central economic scenario derived using a broadly equivalent approach to that
used in September 2021, with the starting point of the scenario updated to
reflect the actual movements of economic variables in the six months. The
general trend of the Group's central forecasts remains broadly positive in the
medium term, though with a period of adverse economic pressures in the short
term.
Compared to the central scenario adopted at 30 September 2021, the new
central forecast is more pessimistic in the short term with higher inflation
and lower growth than the September scenarios, before converging later in the
forecast period, reflecting the current pressures on the UK economy. UK
interest rates are forecast to be higher than was forecast in September
following recent rises and indications of further rises to come. This scenario
does, however, start from a generally more positive position than predicted in
September as the impacts of the omicron variant of Covid proved less severe
than expected, and house price growth in the six months remained strong,
contrary to many predictions.
The upside and downside scenarios continue to be derived from the central
scenario, as they have been in previous periods. The shapes of these three
scenarios are broadly similar across the period, except that house price
inflation follows a smoother track in the upside scenario than in the central
scenario while the downside scenario includes declining house prices.
The severe scenario has been derived from stress testing scenarios published
by the Bank of England, as in previous periods. However, due to the crisis in
Ukraine, the Bank of England has delayed publication of its 2022 stress
testing parameters. Instead, the Group has reverted to the last stress
scenarios published by the Bank before the onset of Covid in 2020. The 'rates
up' variant of the stress scenarios was chosen as more representative of
likely future stresses than the 'rates down' variant, and the rate of house
price recovery was slowed, to ensure an appropriately severe impact on
buy-to-let mortgages in the latter part of the forecast period.
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 2021.
While the direct impacts of the Covid pandemic have begun to recede, fresh
uncertainties, particularly around cost of living issues in the UK and the
conflict in Ukraine, have arisen in the period, and the Group concluded it was
not yet appropriate to move towards a more normal set of weightings. A
sensitivity examining the impact of this decision is set out below.
The weightings attached to each scenario are set out below
31 March 30 September 31 March
2022 2021 2021
Central Scenario 40% 40% 40%
Upside Scenario 10% 10% 10%
Downside Scenario 35% 35% 35%
Severe Scenario 15% 15% 15%
100% 100% 100%
The Group's economic scenarios comprise seven 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') 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 values of each of these variables in each of the first
five years of the forecast period are set out below. Values are shown for the
twelve months ending on 31 March or 30 September in each year as appropriate.
31 March 2022
GDP (year-on-year change)
2023 2024 2025 2026 2027
% % % % %
Central scenario 2.8 2.0 1.1 1.9 1.5
Upside scenario 4.2 2.5 1.4 2.0 1.5
Downside scenario 1.6 1.8 1.1 1.9 1.5
Severe scenario (1.4) (2.0) 1.2 1.1 1.0
HPI (year-on-year change)
2023 2024 2025 2026 2027
% % % % %
Central scenario 3.2 0.6 3.0 3.5 3.2
Upside scenario 6.8 4.6 4.0 4.9 5.0
Downside scenario 2.5 (3.2) (2.4) 1.6 3.2
Severe scenario (4.8) (15.4) (14.4) 2.3 3.2
BBR (rate)
2023 2024 2025 2026 2027
% % % % %
Central scenario 1.3 1.9 2.0 2.0 2.0
Upside scenario 1.1 1.3 1.3 1.3 1.3
Downside scenario 0.8 0.8 0.8 0.8 0.8
Severe scenario 2.3 4.0 4.0 3.9 3.4
CPI (rate)
2023 2024 2025 2026 2027
% % % % %
Central scenario 7.2 3.0 1.7 1.9 2.0
Upside scenario 6.4 2.4 2.0 1.9 2.0
Downside scenario 6.1 3.1 2.0 2.0 2.0
Severe scenario 7.9 4.9 2.9 2.4 2.0
Unemployment (rate)
2023 2024 2025 2026 2027
% % % % %
Central scenario 4.0 4.3 4.6 4.5 4.3
Upside scenario 3.8 3.8 4.0 3.9 3.8
Downside scenario 4.4 4.7 5.0 4.9 4.7
Severe scenario 6.4 9.2 8.8 8.2 7.5
Secured lending (annual change)
2023 2024 2025 2026 2027
% % % % %
Central scenario 2.7 3.9 4.1 4.0 3.5
Upside scenario 3.4 4.6 4.9 4.8 4.3
Downside scenario 1.9 3.1 3.4 3.3 2.8
Severe scenario 1.9 (0.9) 0.2 2.3 3.4
Consumer credit (annual change)
2023 2024 2025 2026 2027
% % % % %
Central scenario 4.3 5.0 4.6 4.9 4.5
Upside scenario 5.0 5.8 5.4 5.6 5.3
Downside scenario 3.5 4.3 3.9 4.1 3.8
Severe scenario (2.8) (4.6) (2.3) 1.6 4.0
31 March 2021
GDP (year-on-year change)
2022 2023 2024 2025 2026
% % % % %
Central scenario 11.4 4.3 2.0 1.9 2.1
Upside scenario 12.2 3.5 2.0 2.0 2.0
Downside scenario 10.3 4.8 2.5 1.9 2.1
Severe scenario 6.7 7.7 3.6 1.8 1.9
HPI (year-on-year change)
2022 2023 2024 2025 2026
% % % % %
Central scenario 0.4 1.3 2.8 2.9 3.2
Upside scenario 3.8 3.5 4.7 4.6 2.9
Downside scenario (4.8) (6.3) (0.6) 2.1 2.0
Severe scenario (15.3) (11.1) (6.9) (0.6) 0.9
BBR (rate)
2022 2023 2024 2025 2026
% % % % %
Central scenario 0.1 0.1 0.3 0.6 0.8
Upside scenario 0.1 0.3 0.8 1.0 1.0
Downside scenario 0.1 0.1 0.1 0.3 0.4
Severe scenario (0.1) (0.1) 0.0 0.1 0.2
CPI (rate)
2022 2023 2024 2025 2026
% % % % %
Central scenario 1.7 2.0 1.9 2.1 2.0
Upside scenario 1.9 2.2 2.2 2.0 2.0
Downside scenario 1.3 1.5 2.0 2.2 2.3
Severe scenario 0.9 0.3 1.1 1.6 1.9
Unemployment (rate)
2022 2023 2024 2025 2026
% % % % %
Central scenario 6.9 5.3 4.8 4.4 4.3
Upside scenario 5.8 5.4 4.8 4.4 4.3
Downside scenario 7.9 6.5 5.7 5.0 4.8
Severe scenario 11.8 10.4 7.1 5.2 4.8
Secured lending (annual change)
2022 2023 2024 2025 2026
% % % % %
Central scenario 4.9 3.9 3.4 3.1 3.1
Upside scenario 5.4 5.1 4.5 4.0 3.6
Downside scenario 3.6 3.0 2.7 3.3 3.8
Severe scenario 0.2 (2.3) (0.4) 1.7 2.5
Consumer credit (annual change)
2022 2023 2024 2025 2026
% % % % %
Central scenario (0.6) 3.9 5.0 5.9 6.1
Upside scenario 0.7 5.8 7.0 7.6 8.2
Downside scenario (1.8) 2.8 2.0 2.0 2.0
Severe scenario 5.1 3.2 1.0 2.2 4.5
30 September 2021
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%
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%
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%
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%
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.
31 March 2022
Central Upside Downside scenario Severe
scenario
scenario
scenario
Max Min Max Min Max Min Max Min
%
%
%
%
%
%
%
%
Economic driver
GDP 3.4 1.1 4.4 1.2 2.4 0.8 2.3 (4.4)
HPI 6.5 0.0 8.2 3.8 6.1 (4.8) 5.1 (17.8)
BBR 2.0 1.0 1.3 1.0 0.8 0.8 4.0 0.8
CPI 8.0 1.6 7.5 1.8 7.0 1.9 8.5 1.9
Unemployment 4.7 3.9 4.1 3.7 5.1 4.3 9.2 4.5
Secured lending 4.5 2.5 5.3 3.3 3.8 1.8 3.7 (1.2)
Consumer credit 5.0 3.0 5.8 3.8 4.3 2.3 4.8 (5.2)
31 March 2021
Central Upside Downside scenario Severe
scenario
scenario
scenario
Max Min Max Min Max Min Max Min
%
%
%
%
%
%
%
%
Economic driver
GDP 18.1 1.9 20.7 1.9 16.5 1.9 14.3 (0.3)
HPI 7.4 (3.8) 8.6 1.1 3.4 (10.0) 3.5 (20.2)
BBR 0.8 0.1 1.0 0.1 0.5 0.1 0.2 (0.1)
CPI 2.1 1.4 2.3 1.6 2.3 1.0 2.0 0.2
Unemployment 7.8 4.2 5.9 4.2 8.5 4.6 11.9 4.5
Secured lending 5.3 3.0 5.5 3.5 4.0 2.5 2.7 (2.5)
Consumer credit 6.1 (3.4) 8.2 (2.5) 4.6 (5.9) 9.2 0.3
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)
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.
31 March 31 March 30 September
2022 2021 2021
£m £m £m
Provision using central scenario
100% weighted
Mortgage Lending 27.7 37.2 24.6
Commercial Lending 19.3 27.6 26.0
Idem Capital 1.4 3.4 2.1
48.4 68.2 52.7
Calculated impairment provision 55.2 82.4 65.4
Effect of multiple economic scenarios 6.8 14.2 12.7
Sensitivity
The calculation of impairment provisions under IFRS 9 is subject to a variety
of uncertainties arising from assumptions, forecasts and expectations about
future events and conditions. To illustrate the impact of these uncertainties,
sensitivity calculations have been performed for some of the most significant.
These sensitivities are intended as mathematical illustrations of the impacts
of the various assumptions of the Group's modelling. They do not necessarily
represent alternative potential impairment values as other factors might also
need to be considered in arriving at a final provision figure if circumstances
differed from those at the balance sheet date.
Economic conditions
To illustrate the potential impact of differing future economic scenarios on
the total impairment, the provisions which would be calculated if each of the
economic scenarios were 100% weighted are shown below.
Scenarios 31 March 2022 30 September 2021
Provision Difference Provision £m Difference £m
£m £m
Central 48.4 (6.8) 52.7 (12.7)
Upside 41.4 (13.8) 47.1 (18.3)
Downside 51.5 (3.7) 68.1 2.7
Severe downside 96.7 41.5 106.1 40.7
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.
Scenario weightings
In order to illustrate the impact of scenario weightings on the outcomes, the
impairment provision requirements were sensitised using alternative
weightings. The sensitivity is based on the weightings used at IFRS 9
transition on 1 October 2018. The use of the 2018 weighting is intended to
represent a more settled outlook than has been evident at either of the three
most recent year ends. PMAs are assumed to remain constant.
The weightings used, at the results of applying this sensitivity to the 31
March 2022 scenarios are set out below.
Weighting Impairment Difference
Central Upside Downside Severe £m £m
As reported 40% 10% 35% 15% 55.2 -
Sensitivity 40% 30% 25% 5% 47.4 7.8
Significant increase in credit risk
The most significant driver of SICR is relative PD. If all PDs across the
Group's principal buy-to-let mortgage book were increased by 10%, loans with a
gross value of £97.5m would transfer from Stage 1 to Stage 2 (30 September
2021: £99.0m), and the total provision would increase by £0.7m from the
combined effects of higher PDs on expected losses and the impact of providing
for expected lifetime losses, rather than 12-month losses on the additional
Stage 2 cases (30 September 2021: £1.1m).
Value of security
The principal assumptions impacting the LGD are the estimated security values.
If the rate of growth in house prices assumed by the model after the forecast
minimum were halved, ignoring any PD effects, then the provision for the
Group's first and second mortgage assets under the central scenario would
increase by £2.6m (30 September 2021: £3.3m).
Receiver of rent
The majority of receiver of rent cases, which are included in Stage 3, are
managed long-term and therefore their assumed realisation date has an
important impact on the provision calculation. If the assumed rate of
realisation was increased by 20%, the impairment provision in the central
scenario would increase by £0.5m (30 September 2021: £0.6m).
12. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING
31 March 31 March 30 September 30 September 2020
2022 2021 2021
£m £m £m £m
Derivative financial assets 201.7 180.7 44.2 463.3
Derivative financial liabilities (32.5) (76.2) (43.9) (132.4)
169.2 104.5 0.3 330.9
Of which:
Cross-currency basis swaps - 153.0 - 445.3
Interest rate swaps in hedging relationships (3.0)
151.7 (51.6) (115.6)
Other interest rate swaps 17.6 3.0 3.5 1.0
Currency futures (0.1) 0.1 (0.2) 0.2
169.2 104.5 0.3 330.9
All hedging relationships and strategies at 30 September 2021 described in
note 19 to the 2021 Group Accounts have continued in the period. The Group's
remaining LIBOR-linked derivatives transitioned to a SONIA-linked basis during
the period, on the basis set out in the 2021 Group Accounts.
The balances held on the Group's balance sheet relating to the hedging of
interest rate risk on its fixed rate customer loan and deposit balances are
summarised below.
Note 31 March 31 March 30 September 30 September 2020
2022 2021 2021
£m £m £m £m
Derivative financial instruments
Assets 201.7 27.7 44.2 18.0
Liabilities (32.5) (76.2) (43.9) (132.4)
169.2 (48.5) 0.3 (114.4)
Fair value hedging adjustments
On loans to customers 10 (151.5) 58.1 5.5 109.7
On retail deposits 14 30.9 (3.1) 3.0 (10.4)
(120.6) 55.0 8.5 99.3
Net balance sheet position 48.6 6.5 8.8 (15.1)
Collateral balances
Posted (in sundry assets) - 61.3 36.6 103.5
Received (in sundry liabilities)
16 (64.2) (3.1) (0.2) -
(64.2) 58.2 36.4 103.5
Certain of the Group's securitisation borrowings were denominated in euros and
US dollars, with the last of these liabilities being repaid in 2021. All such
borrowings were swapped at inception so that they had the effect of sterling
borrowings. These swaps provided an effective hedge against exchange rate
movements, and were accounted for as cash flow hedges, but the requirement to
carry them at fair value led, when exchange rates had moved significantly
since the issue of the notes, to large balances for the swaps being carried in
the balance sheet. The debit balance on such swaps was compensated for by
retranslating the borrowings at the current exchange rate.
These compensating differences gave rise to the non-cash items shown in note
22 as 'Movements related to asset backed loan notes denominated in currency.'
13. INTANGIBLE ASSETS
Intangible assets at net book value comprise:
31 March 31 March 30 September 30 September 2020
2022 2021 2021
£m £m £m £m
Goodwill 164.4 164.4 164.4 164.4
Computer software 3.4 3.0 3.4 2.2
Other intangibles 2.3 3.1 2.7 3.5
Total assets 170.1 170.5 170.5 170.1
The balance for goodwill at 31 March 2022 shown above includes £113.0m in
respect of the SME Lending Cash Generating Unit ('CGU') and £49.8m in respect
of the Development Finance CGU. Given the changes in the economic outlook for
the UK since 30 September 2021, and their potential impact on the outlook for
these businesses, these balances have been retested for impairment in
accordance with IAS 36 for good order.
These tests were conducted in the same way as those described in note 24 to
the 2021 Group Accounts, using updated forecasts. The levels of business
activity in these forecasts are considered by management to form a reasonable
basis for the assessment of goodwill based on past experience and the current
economic environment. The revised key assumptions are set out below.
· The level of business activity in the SME Lending CGU assumes a
compound annual growth rate ('CAGR') for new business over the five-year
period of 13.8%, a small reduction from the 13.9% assumed at 30 September 2021
· The level of business activity in the Development Finance CGU assumes
a CAGR for new commitments over the five-year period of 14.6%, compared with
13.2% used at 30 September 2021
· In both CGUs cash flows beyond the five-year budget are extrapolated
using a constant growth rate of 1.6% (30 September 2021: 1.6%) which does not
exceed the long-term average growth rates for the markets in which the
businesses are active
· The discount rate in both tests is based on third party estimates of
the implied industry cost of capital. The pre-tax discount rate applied to the
SME Lending cash flow projection is 13.4% (30 September 2021: 13.4%) while
that applied to the Development Finance CGU was 13.3% (30 September 2021:
13.2%)
As an illustration of the sensitivity of these impairment tests to movements
in the key assumptions:
· The Group has calculated that a 0.0% growth rate combined with a 4.0%
reduction in profit levels in the SME Lending CGU and a stable pre-tax
discount rate would eliminate the headroom in the projection. A 0.0% growth
rate combined with a 5.0% reduction in profit levels and a 46 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 2021, a 0.0% growth rate combined
with a 15.0% reduction in profit levels and a 159 basis point increase in the
pre-tax discount rate would have eliminated the headroom in the projection. A
0.0% growth rate combined with a 20.7% reduction in profit levels and a 125
basis point increase in the pre-tax discount rate would have generated a write
down of £10.0m
· Management believes any reasonably possible change in the key
assumptions in the Development Finance CGU would not cause the recoverable
amount of the CGU to fall below the balance sheet carrying value. This was
also the case in the testing carried out at 30 September 2021
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 below.
31 March 31 March 30 September 30 September 2020
2022 2021 2021
£m £m £m £m
Fixed rate 5,711.5 5,312.8 5,466.0 4,975.9
Variable rates 4,142.2 3,318.4 3,834.4 2,880.7
9,853.7 8,631.2 9,300.4 7,856.6
The weighted average interest rate on retail deposits at 31 March 2022,
analysed by charging method, is set out below.
31 March 31 March 30 September 30 September 2020
2022 2021 2021
% % % %
Fixed rate 1.26 1.46 1.25 1.69
Variable rates 0.63 0.46 0.42 0.72
All deposits 0.99 1.08 0.91 1.34
The contractual maturity of these deposits is analysed below.
31 March 31 March 30 September 30 September 2020
2022 2021 2021
£m £m £m £m
Amounts repayable
In less than three months 1,000.7 670.1 789.0 565.0
In more than three months but not more than one year 3,105.4
3,382.0 2,947.4 2,725.6
In more than one year, but not more than two years 1,580.1
1,457.2 1,599.4 1,541.6
In more than two years, but not more than five years 507.4
413.4 596.4 664.8
Total term deposits 6,253.3 5,813.3 5,981.9 5,497.0
Repayable on demand 3,600.4 2,817.9 3,318.5 2,359.6
9,853.7 8,631.2 9,300.4 7,856.6
Fair value adjustments for portfolio hedging (note 12) (3.0)
(30.9) 3.1 10.4
9,822.8 8,634.3 9,297.4 7,867.0
15. BORROWINGS
On 4 March 2022 Fitch Ratings upgraded the Group's Long-Term Issuer Default
Rating from BBB to BBB+, with a stable outlook. It also upgraded the senior
unsecured debt rating to BBB from BBB- and the rating of the Groups Tier-2
bond from BB+ to BBB-, meaning that this security now enjoys an
investment-grade rating.
All borrowings described in the Group Accounts for the year ended 30 September
2021 remained in place throughout the period, except as noted below.
On 21 October 2021 all of the Group's drawings under the Bank of England Term
Funding Scheme for SME's ('TFSME') were repaid and redrawn, extending the
tenor of this borrowing to 21 October 2025. No further amounts were drawn in
the period and the TFSME is no longer available for new drawings.
The Group's remaining drawings under the Bank of England Term Funding Scheme
('TFS') were repaid in the year. The Group retains access to the Bank of
England Indexed Long-Term Repo scheme ('ILTR') for short term liquidity
purposes and £100.0m had been drawn at 31 March 2022 (30 September 2021:
£nil, 31 March 2021: £nil) at an interest rate of 0.15% above bank base
rate.
On 8 November 2021 revisions were agreed to the Group's warehouse facility,
held in Paragon Seventh Funding Limited. This increased the maximum facility
to £450.0m and amended the interest rate payable to 0.5% above SONIA. The
commitment period was extended for an initial 13-month period with the ability
to extend monthly until a potential final maturity date of 24 November 2024.
The Group's £125.0m retail bond was repaid in full at its due date in January
2022.
Repayments made in respect of the Group's borrowings are shown in note 24.
During the period all of the Group's remaining LIBOR linked borrowings were
transitioned to SONIA based rates, as described in the 2021 Annual Report and
Accounts.
16. Sundry Liabilities
Sundry liabilities include:
Note 31 March 2022 31 March 2021 30 September 2021
£m £m £m
Amounts falling due within one year
Contingent consideration 1.9 5.3 4.6
Lease liabilities 2.2 1.6 1.5
CSA liabilities 12 64.2 3.1 0.2
Other sundry liabilities 66.9 57.9 62.3
135.2 67.9 68.6
Amounts falling due after more than one year
Contingent consideration - 6.2 2.9
Lease liabilities 7.6 3.8 8.0
Other sundry liabilities 13.0 18.0 11.2
20.6 28.0 22.1
Total
Contingent consideration 1.9 11.5 7.5
Lease liabilities 9.8 5.4 9.5
Other sundry liabilities 144.1 79.0 73.7
155.8 95.9 90.7
17. RETIREMENT BENEFIT OBLIGATIONS
The defined benefit obligation at 31 March 2022 has been calculated on a
year-to-date basis. Since the last IAS 19 actuarial valuation at 30 September
2021, there have been movements in financial conditions, requiring an
adjustment to the actuarial assumptions underlying the calculation of the
defined benefit obligation at 31 March 2022. In particular, over the period
since the 30 September 2021 actuarial valuation, the discount rate has
increased by 75 basis points per annum, whereas expectations of long-term
inflation have increased by a lower amount, around 20 basis points.
The net effect of these changes, together with the Group's contributions and
the performance of the plan assets, has resulted in the value of the net
defined benefit obligations at 31 March 2022 moving to a surplus position from
a deficit at 30 September 2021. The impact of allowing for the changes in
actuarial assumptions has been recognised as an actuarial gain in other
comprehensive income.
The Group has recognised the surplus as an asset at the balance sheet date as
it anticipates being able to access economic benefits at least as great as the
carrying value. However such assets are eliminated from capital for regulatory
purposes (note 26).
The movements in the amount recognised in respect of the defined benefit plan
during the six month period ended 31 March 2022 are summarised below.
Six months to Six months to Year to
31 March 31 March 30 September 2021
2022 2021
£m £m £m
Opening pension (deficit) (10.3) (20.4) (20.4)
Employer contributions 1.9 2.6 4.8
Amounts posted to profit and loss
Current service cost (0.4) (1.1) (1.8)
Net funding cost (note 4) (0.1) (0.2) (0.3)
Administrative expenses (0.4) (0.5) (0.8)
Amounts posted to other comprehensive income
Return on plan assets not included in interest 11.0
(7.5) 2.7
Experience gain on liabilities - - -
Actuarial gain / (loss) from changes in financial assumptions (1.7)
21.2 5.1
Actuarial gain / (loss) from changes in demographic assumptions (1.1)
- -
Closing pension surplus / (deficit) 4.4 (11.8) (10.3)
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 surplus / (deficit).
18. Called-up share capital
Movements in the issued share capital in the period were:
Six months to Six months to Year to
31 March 31 March 30 September 2021
2022 2021
Number Number Number
Ordinary shares of £1 each
Opening share capital 262,495,185 261,777,972 261,777,972
Shares issued 113,554 219,779 717,213
Shares cancelled (12,100,834) - -
Closing share capital 250,507,905 261,997,751 262,495,185
During the period, the Company issued 113,554 shares (six months ended
31 March 2021: 219,779; year ended 30 September 2021: 717,213) to satisfy
options granted under Sharesave schemes for a consideration of £341,517 (six
months ended 31 March 2021: £751,254; year ended 30 September 2021:
£2,196,934).
On 24 November 2021, 12,100,834 shares held in treasury at 30 September 2021
were cancelled.
19. RESERVES
31 March 31 March 30 September 30 September 2020
2022 2021 2021
£m £m £m £m
Share premium account 70.4 69.2 70.1 68.7
Capital redemption reserve 62.4 50.3 50.3 50.3
Merger reserve (70.2) (70.2) (70.2) (70.2)
Cash flow hedging reserve - 0.2 - 2.5
Profit and loss account 1,013.2 927.4 1,005.9 880.7
1,075.8 976.9 1,056.1 932.0
20. OWN SHARES
31 March 31 March 30 September 2021
2022 2021
£m £m £m
Treasury shares
Opening balance 60.7 23.0 23.0
Shares purchased 27.2 - 37.7
Shares cancelled (60.7) - -
Closing balance 27.2 23.0 60.7
ESOP shares
Opening balance 16.0 14.8 14.8
Shares purchased 12.5 - 4.5
Options exercised (9.1) (2.7) (3.3)
Closing balance 19.4 12.1 16.0
Total closing balance 46.6 35.1 76.7
Total opening balance 76.7 37.8 37.8
Number of shares held
Treasury 5,025,743 5,218,702 12,100,834
ESOP 4,015,675 3,056,632 3,732,324
Total at own shares 9,041,418 8,275,334 15,833,158
At 31 March 2022 an irrevocable instruction for the purchase of a further
£12.7m of shares was in place. This instruction was completed before the
approval date of this report.
21. EQUITY DIVIDEND
Amounts recognised as distributions to equity shareholders in the period:
Six months to Six months to 31 March Year to 30 September 2021
31 March 2021
2022
£m £m £m
Final dividend for the year ended 30 September 2021 of 18.9p per share
46.6 - -
Final dividend for the year ended 30 September 2020 of 14.4p per share
- 36.5 36.5
Interim dividend for the year ended 30 September 2021 of 7.2p per share
- - 18.1
46.6 36.5 54.6
An interim dividend of 9.4p is proposed for the period (2021: 7.2p per share),
for the reasons set out in note 26(c). This will be paid on 29 July 2022 with
a record date of 8 July 2022. The amount expected to be absorbed by this
dividend, based on the number of shares in issue at the balance sheet date is
£22.7m (31 March 2021: £18.3m). The interim dividend will be recognised in
the accounts when it is paid.
22. NET CASH FLOW FROM OPERATING ACTIVITIES
Six months to Six months to Year to
31 March 31 March 30 September 2021
2022 2021
£m £m £m
Profit before tax 143.6 96.4 213.7
Non-cash items included in profit, and other adjustments
Depreciation of property, plant and equipment 4.3
1.7 2.0
(Profit) / loss on disposal of property, plant and equipment 0.1
(0.1) -
Amortisation of intangible assets 1.0 1.0 2.0
Movements related to asset backed loan notes denominated in (442.3)
currency
- (289.4)
Other non-cash movements on borrowings 1.0 (1.9) 2.5
Impairment losses on loans to customers 1.3 6.0 (4.7)
Charge for share based remuneration 4.4 4.4 8.9
Net (increase) / decrease in operating assets
Assets held for leasing (3.4) 1.7 0.2
Loans to customers (513.5) (190.9) (766.6)
Derivative financial instruments (157.5) 282.6 419.1
Fair value of portfolio hedges 157.0 51.6 104.2
Other receivables 28.4 39.2 58.8
Net increase / (decrease) in operating liabilities
Retail deposits 553.3 774.6 1,443.8
Derivative financial instruments (11.4) (56.2) (88.5)
Fair value of portfolio hedges (27.9) (7.3) (13.4)
Other liabilities 68.1 (5.1) (15.7)
Cash generated by operations 246.0 708.7 926.4
Income taxes (paid) (24.9) (17.0) (48.3)
Net cash flow generated by operating activities
221.1 691.7 878.1
Cash flows relating to plant and equipment held for leasing under operating
leases are classified as operating cash flows.
23. NET CASH FLOW USED IN INVESTING ACTIVITIES
Six months to Six months to Year to
31 March 31 March 30 September 2021
2022 2021
£m £m £m
Proceeds from sales of operating property, plant and equipment -
0.1 -
Purchases of operating property, plant and equipment (1.9)
(0.7) (0.9)
Purchases of intangible assets (0.6) (1.4) (2.4)
Net cash (utilised) by investing activities (1.2) (2.3) (4.3)
24. NET CASH FLOW FROM FINANCING ACTIVITIES
Six months to Six months to Year to
31 March 31 March 30 September 2021
2022 2021
£m £m £m
Shares issued 0.4 0.7 2.1
Dividends paid (note 21) (46.6) (36.5) (54.6)
Repayment of asset backed floating rate notes (39.3) (970.3) (2,313.1)
Issue of Tier-2 bond - 149.2 148.9
Redemption of Tier-2 bond - (130.9) (153.7)
Redemption of Retail Bonds (125.0) (60.0) (60.0)
Movement on repurchase agreements - 50.0 -
Movement on central bank facilities 31.0 390.0 964.6
Movement on other bank facilities 140.9 97.8 71.9
Capital element of lease payments (0.7) (1.2) (2.5)
Purchase of own shares (note 20) (39.7) - (42.2)
Sale of shares (0.7) 0.1 -
Net cash (utilised) by financing activities (79.7) (511.1) (1,438.6)
25. RELATED PARTY TRANSACTIONS
In the six months ended 31 March 2022, the Group has continued the related
party relationships described in note 47 on page 243 of the Group's 2021
Annual Report and Accounts. Related party transactions in the period comprise
the compensation of the Group's key management personnel, the acceptance of
retail deposits from certain non-executive directors, and transactions with
the Group Pension Plan.
There have been no changes in these relationships which could have a material
effect on the financial position or performance of the Group in the period.
Retail deposits of £18,000 by directors were outstanding at the period end
(31 March 2021: £51,000, 30 September 2021: £16,000) and the maximum
outstanding in the period was £19,000 (31 March 2021: £301,000, 30
September 2021: £301,000).
Except for the transactions referred to above, there have been no related
party transactions in the six months ended 31 March 2022.
SELECTED NOTES TO THE ACCOUNTS - CAPITAL AND FINANCIAL RISK
For the six months ended 31 March 2022 (Unaudited)
The notes below describe the processes and measurements which the Group uses
to manage its 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 covered by the Independent Review Report. 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 sets the amount of capital in proportion to risk, availability 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 individual capital guidance setting an amount of regulatory
capital, which the Group is required to hold relative to its risk weighted
assets in order to safeguard depositors from loss in the event of severe
losses being incurred by the Group. This is defined by the international Basel
III rules, set by the Basel Committee on Banking Supervision ('BCBS') and
which, following the implementation of the Financial Services Act 2021 on 1
January 2022, are implemented through the PRA Rulebook.
The Group's regulatory capital is monitored by the Board of Directors, its
Risk and Compliance Committee and the Asset and Liability Committee, 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 tables below demonstrate that at 31 March 2022 the Group's total
regulatory capital of £1,242.4m (31 March 2021: £1,203.8m, 30 September
2021: £1,205.8m) was comfortably in excess of the amounts required by the
regulator, including £625.8m in respect of its Total Capital Requirement
('TCR') (31 March 2021: £585.9m, 30 September 2021: £604.2m), which is
comprised of fixed and variable elements (none of these amounts are covered by
the independent review report).
At 31 March 2022 the Group's TCR represented 8.8% of Total Risk Exposure
('TRE') (30 September 2021: 8.8%).
The CRR also requires firms to hold additional capital buffers, including a
Capital Conservation Buffer ('CCoB') of 2.5% of TRE (at 31 March 2022) and a
Counter Cyclical Buffer ('CCyB'), currently 0.0% of TRE (30 September 2021:
0.0%). The UK CCyB will increase to 1.0% of TRE from December 2022, and its
long-term rate 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 PRA Rulebook or the regulator. A reconciliation of the
Group's equity to its regulatory capital determined in accordance with the PRA
Rulebook at 31 March 2022 is set out below.
Note 31 March 31 March 30 September 30 September 2020
2022 2021 2021
£m £m £m £m
Total equity § 1,279.7 1,203.8 1,241.9 1,156.0
Deductions
Proposed dividend 21 (22.7) (18.3) (46.6) (36.4)
Irrevocable share buy-back instructions
20 (12.7) - - -
IFRS 9 transitional relief * 21.9 41.4 29.7 42.3
Intangible assets 13 (170.1) (170.5) (170.5) (170.1)
Pension surplus net of deferred tax
(3.5) - - -
Software relief † - 1.2 1.4 -
Prudent valuation adjustments β (0.1)
(0.2) (0.3) (0.6)
Common Equity Tier 1 ('CET1') capital 1,055.8
1,092.4 1,057.3 991.2
Other tier 1 capital - - - -
Total Tier 1 capital 1,092.4 1,057.3 1,055.8 991.2
Corporate bond 150.0 169.1 150.0 150.0
Eligibility cap Ф - (22.6) - -
Total Tier 2 capital 150.0 146.5 150.0 150.0
Total regulatory capital ('TRC') 1,205.8
1,242.4 1,203.8 1,141.2
§ Including results for the six months ended 31 March 2022
which have been verified by the Group's external auditor for regulatory
purposes.
* Firms are permitted to phase in the impact of IFRS 9
transition and of the impact of Covid‑related IFRS 9 impairment provisions
over a five year period. This is explained more fully in note 53 (a) to the
2021 Group Accounts.
† Under a relief enacted by the EU in December 2020 an
amount in respect of software assets in intangibles was added back to capital.
This was calculated in accordance with Article 36 (1) (b) of the CRR. This
relief was rescinded for UK firms from 1 January 2022.
β 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 PRA Rulebook.
Ф The PRA Rulebook restricts the amount of tier 2 capital
which is eligible for regulatory purposes to 25% of TCR.
The TRE amount calculated under the PRA Rulebook framework against which this
capital is held, and the proportion of these assets it represents, are
calculated as shown below.
31 March 31 March 30 September 30 September 2020
2022 2021 2021
£m £m £m £m
Credit risk
Balance sheet assets 6,362.5 5,899.6 6,073.5 6,171.7
Off balance sheet 92.0 111.2 143.9 104.1
IFRS 9 transitional relief 21.9 41.4 29.7 42.3
Total credit risk 6,476.4 6,052.2 6,247.1 6,318.1
Operational risk 576.0 544.3 576.0 544.3
Market risk - - - -
Other 43.3 19.5 13.7 85.7
Total risk exposure ('TRE') 7,095.7 6,616.0 6,836.8 6,948.1
Solvency ratios % % % %
CET1 15.4 16.0 15.4 14.3
TRC 17.5 18.2 17.6 16.4
This table is not covered by the Independent Review Report
The risk weightings for credit risk exposures are currently calculated using
the Standardised Approach. The Basic Indicator Approach is used for
operational risk.
On a fully loaded basis (excluding the effect of IFRS 9 transitional relief)
the Group's capital ratios would be:
31 March 31 March 30 September 30 September
2022 2021 2021 2020
£m £m £m £m
CET1 Capital 1,092.4 1,057.3 1,055.8 991.2
Add back: IFRS 9 relief (21.9) (41.4) (29.7) (42.3)
Fully loaded CET1 Capital 1,070.5 1,015.9 1,026.1 948.9
TRC 1,242.4 1,203.8 1,205.8 1,141.2
Add back: IFRS 9 relief (21.9) (41.4) (29.7) (42.3)
Impact on Tier 2 eligibility - (0.9) - -
Fully loaded TRC 1,220.5 1,161.5 1,176.1 1,098.9
Total risk exposure 7,095.7 6,616.0 6,836.8 6,948.1
Add back: IFRS 9 relief (21.9) (41.4) (29.7) (42.3)
Fully loaded TRE 7,073.8 6,574.6 6,807.1 6,905.8
Fully loaded solvency ratios % % % %
CET1 15.1 15.5 15.1 13.7
TRC 17.3 17.7 17.3 15.9
This table is not covered by the Independent Review Report
The TRC at 31 March 2021 on the fully loaded basis of £1,220.5m (31 March
2021: £1,161.5m, 30 September 2021: £1,176.1m) was in excess of the TCR of
£623.9m (31 March 2021: £582.4m, 30 September 2021: £601.8m) on the same
basis (amounts not covered by the Independent Review Report).
The table below shows the calculation of the UK leverage ratio, based on the
consolidated balance sheet assets adjusted as required. 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, it has 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 31 March 31 March 30 September 30 September 2020
2022 2021 2021
£m £m £m £m
Total balance sheet assets 15,751.0 15,488.8 15,137.0 15,505.5
Add Credit fair value adjustments on loans to customers
10 151.5 - - -
Debit fair value adjustments on retail deposits
14 30.9 - 3.0 -
Adjusted balance sheet assets 15,933.4 15,488.8 15,140.0 15,505.5
Less: Derivative assets 12 (201.7) (180.7) (44.2) (463.3)
Central bank deposits 9 (1,265.7) (1,832.3) (1,142.0) (1,637.1)
Cash Ratio Deposits (27.6) (19.3) (23.7) (15.1)
Accrued interest on sovereign exposures -
(0.4) - -
On-balance sheet items 14,438.0 13,456.5 13,930.1 13,390.0
Less: Intangible assets 13 (170.1) (170.5) (170.5) (170.1)
Pension surplus 17 (4.4) - - -
Software relief - 1.2 1.4 -
Total on balance sheet exposures 14,263.5 13,287.2 13,761.0 13,219.9
Derivative assets 12 201.7 180.7 44.2 463.3
Potential future exposure on derivatives
29.4 42.7 36.3 92.3
Total derivative exposures 231.1 223.4 80.5 555.6
Post offer pipeline at gross notional amount
1,322.2 1,118.4 1,380.3 949.1
Adjustment to convert to credit equivalent amounts
(1,110.4) (916.3) (1,128.3) (773.8)
Off balance sheet items 211.8 202.1 252.0 175.3
Tier 1 capital 1,092.4 1,057.3 1,055.8 991.2
Total leverage exposure before IFRS 9 relief
14,706.4 13,712.7 14,093.5 13,950.8
IFRS 9 relief 21.9 41.4 29.7 42.3
Total leverage exposure 14,728.3 13,754.1 14,123.2 13,993.1
UK leverage ratio 7.4% 7.7% 7.5% 7.1%
This table is not covered by the Independent Review Report
The fully loaded leverage ratio is calculated as follows:
31 March 31 March 30 September 30 September 2020
2022 2021 2021
£m £m £m £m
Fully loaded tier 1 capital 1,070.5 1,015.9 1,026.1 948.9
Total leverage exposure before IFRS 9 relief 14,706.4 13,712.7 14,093.5 13,950.8
Fully loaded UK leverage exposure 7.3% 7.4% 7.3% 6.8%
This table is not covered by the Independent Review Report
The regulatory capital disclosures in these condensed 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 period.
This leverage ratio is prescribed by the PRA and differs from the Basel / CRR
ratio due to the exclusion of central bank deposits from exposures.
(b) Return on tangible equity ('RoTE')
RoTE is defined by the Group by comparing the profit after tax for the period,
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 annualised RoTE for the six months ended 31 March
2022 is derived as follows:
31 March 31 March 30 September 30 September 2020
2022 2021 2021
£m £m £m £m
Profit for the period 109.1 74.2 164.5 91.3
Amortisation of intangible assets 1.0 1.0 2.0 2.0
Adjusted profit 110.1 75.2 166.5 93.3
Divided by
Opening equity 1,241.9 1,156.0 1,156.0 1,108.4
Opening intangible assets (170.5) (170.1) (170.1) (171.1)
Opening tangible equity 1,071.4 985.9 985.9 937.3
Closing equity 1,279.7 1,203.8 1,241.9 1,156.0
Closing intangible assets (170.1) (170.5) (170.5) (170.1)
Closing tangible equity 1,109.6 1,033.3 1,071.4 985.9
Average tangible equity 1,090.5 1,009.6 1,028.7 961.6
Return on tangible equity 20.2% 14.9% 16.2% 9.7%
This table is not covered by the Independent Review Report
(c) Dividend 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 and, other than the requirement for Paragon Bank PLC to retain an
appropriate level of regulatory capital, 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 Company has also indicated that its
interim dividend per share will normally be 50% of the previous final
dividend, in the absence of any indicators which might make such a level of
payment inappropriate (note 21).
Following a review of the capital position and forecasts, and considering the
capital impacts of the stress testing carried out as part of the ICAAP and
forecasting processes, the Board determined that an interim distribution in
accordance with this policy was appropriate. It therefore declared an interim
dividend for the year of 9.4p per share (2021 H1: 7.2p), 50% of the 18.9p
final dividend declared for 2021.
In addition, at the time of authorising the 2021 half year report the Board
approved a share buy-back of up to £40.0m of shares, which was completed in
the period. At the time of the approval of the 2021 year end accounts a
further buyback of £50.0m was authorised. This commenced in the period and at
31 March 2021 £27.2m (including costs) had been expended (note 20).
As part of its half year consideration of the Group's capital position, the
Board agreed to increase the total amount of this programme from £50.0m to
£75.0m. The programme will continue into the second half of the year. All
shares acquired are initially held in treasury.
The directors have considered the distributable reserves of the Company and
concluded that these distributions are appropriate.
27. CREDIT RISK
The Group's 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 credit risk is primarily attributable to its loans to customers.
The Group's loan assets at 31 March 2022, 31 March 2021 and 30 September 2021
are analysed below.
31 March 2022 31 March 2021 30 September 2021
£m % £m % £m %
Buy-to-let mortgages 11,843.4 85.1% 10,919.0 85.2% 11,424.3 85.2%
Owner occupied mortgages 36.3
31.3 0.2% 43.0 0.3% 0.3%
Total first charge residential mortgages 11,460.6
11,874.7 85.3% 10,962.0 85.5% 85.5%
Second charge mortgage loans 281.7
241.9 1.8% 320.2 2.5% 2.1%
Loans secured on residential property 11,742.3
12,116.6 87.1% 11,282.2 88.0% 87.6%
Development finance 672.9 4.8% 552.3 4.3% 608.2 4.5%
Loans secured on property 12,350.5
12,789.5 91.9% 11,834.5 92.3% 92.1%
Asset finance loans 430.3 3.1% 440.4 3.4% 440.5 3.3%
Motor finance loans 238.0 1.7% 229.3 1.8% 229.2 1.7%
Aircraft mortgages 26.7 0.2% 27.4 0.2% 28.2 0.2%
Structured lending 171.7 1.2% 82.6 0.7% 118.9 0.9%
Invoice finance 24.1 0.2% 14.3 0.1% 20.9 0.2%
Total secured loans 13,680.3 98.3% 12,628.5 98.5% 13,188.2 98.4%
Professions finance 49.5 0.4% 27.9 0.2% 33.1 0.3%
RLS, CBILS and BBLS 94.3 0.7% 50.1 0.4% 83.8 0.6%
Other unsecured commercial loans 10.3
14.0 0.1% 11.7 0.1% 0.1%
Unsecured consumer loans
76.8 0.5% 98.1 0.8% 87.3 0.6%
Total loans to customers 13,402.7
13,914.9 100% 12,816.3 100.0% 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 Recovery Loan Scheme ('RLS'), the Coronavirus Business
Interruption Loan Scheme ('CBILS') and the Bounce Back Loan Scheme ('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.
31 March 31 March 30 September
2022 2021 2021
£m £m £m
Buy-to-let mortgages 152.0 175.9 163.3
Development finance 231.7 199.3 217.9
Structured lending 166.8 60.7 108.7
Asset finance - - 10.4
550.5 435.9 500.3
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 31 March 2022 is set out below. The analysed amount represents gross
carrying amount.
Stage 1 Stage 2 Stage 3 POCI Total
£m £m £m £m £m
31 March 2022
Very low risk 10,127.4 678.5 1.4 38.4 10,845.7
Low risk 1,684.4 733.0 81.7 13.9 2,513.0
Moderate risk 160.2 96.0 5.8 18.6 280.6
High risk 41.5 24.0 8.2 18.2 91.9
Very high risk 48.3 28.2 49.2 15.6 141.3
Not graded 86.0 1.2 6.2 4.2 97.6
Total gross carrying amount 12,147.8 1,560.9 152.5 108.9 13,970.1
Impairment (20.3) (6.4) (28.1) (0.4) (55.2)
Total loans to customers 12,127.5 1,554.5 124.4 108.5 13,914.9
31 March 2021
Very low risk 8,954.9 545.2 23.3 44.1 9,567.5
Low risk 1,230.1 89.6 5.7 18.3 1,343.7
Moderate risk 748.0 175.7 10.6 27.5 961.8
High risk 258.0 140.7 48.6 26.3 473.6
Very high risk 44.3 44.4 45.4 19.6 153.7
Not graded 287.8 71.6 33.1 5.9 398.4
Total gross carrying amount 11,523.1 1,067.2 166.7 141.7 12,898.7
Impairment (22.0) (19.0) (41.0) (0.4) (82.4)
Total loans to customers 11,501.1 1,048.2 125.7 141.3 12,816.3
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
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 these cases include fully up-to-date receiver of rent cases,
customers who may be up-to-date on accounts with other lenders 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 (0.7%) 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. This has been reduced from the 1.0% classified as ungraded at
30 September 2021 partly as a result of updated data methodologies. This
disclosure is expected to be developed further in future periods.
Credit characteristic by portfolio
Loans secured on residential property
An analysis of the indexed loan-to-value ('LTV') ratio for those loan accounts
secured on residential property by value at 31 March 2022 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.
31 March 2022 31 March 2021 30 September 2021
First Second First Mortgages Second Charge Mortgages First Mortgages Second Charge Mortgages
Mortgages Charge
Mortgages
% % % % % %
LTV ratio
Less than 70% 89.0 94.2 69.5 80.0 83.8 88.4
70% to 80% 9.5 3.4 27.7 14.5 14.3 8.5
80% to 90% 0.3 1.0 1.2 2.8 0.5 1.5
90% to 100% 0.3 0.4 0.3 0.9 0.3 0.6
Over 100% 0.9 1.0 1.3 1.8 1.1 1.0
100.0 100.0 100.0 100.0 100.0 100.0
Average LTV ratio 59.2 53.2 64.3 60.0 61.6 56.1
Buy-to-let 59.2 64.4 61.2
Owner-occupied 38.9 45.6 42.0
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 increase of 6.7% during the six months ended 31 March 2022 and
annual increases of 14.3% in the year ended 31 March 2022 and 10.0% in the
year ended 30 September 2021.
The geographical distribution of the Group's residential mortgage assets by
gross carrying value is set out below.
First Charge Second Charge
31 March 31 March 30 September 2021 31 March 31 March 30 September 2021
2021
2021
2022 2022
% % % % % %
East Anglia 3.3 3.2 3.3 3.3 3.3 3.3
East Midlands 5.5 5.4 5.5 6.2 6.2 6.3
Greater London 18.3 18.8 18.5 7.9 8.2 7.8
North 3.2 3.2 3.1 4.0 4.0 4.0
North West 10.3 10.4 10.3 7.5 7.3 7.4
South East 31.7 31.7 31.8 38.9 39.4 39.3
South West 8.7 8.6 8.7 8.4 8.2 8.3
West Midlands 5.7 5.4 5.5 7.2 7.1 7.1
Yorkshire and Humberside
7.9 8.2 8.1 6.0 5.9 6.0
Total England 94.6 94.9 94.8 89.4 89.6 89.5
Northern Ireland 0.1 0.1 0.1 1.9 1.8 1.8
Scotland 2.2 1.8 2.0 5.3 5.1 5.2
Wales 3.1 3.2 3.1 3.4 3.5 3.5
100.0 100.0 100.0 100.0 100.0 100.0
Development finance
Development finance loans do not require customers to make payments during the
life of the loan, therefore arrears and past due measures cannot be used to
monitor credit risk. Instead, cases are monitored on an individual basis by
management and Credit Risk. The average loan to gross development value
('LTGDV') ratio for the portfolio at the period end, a measure of security
cover, is analysed below.
31 March 2022 31 March 2021 30 September 2021
By value By number By value By number By value By number
% % % % % %
LTGDV
50% or less 7.9 5.5 5.3 4.9 2.9 5.3
50% to 60% 21.1 21.1 24.4 17.9 27.3 20.6
60% to 65% 43.4 44.0 43.0 46.2 44.3 49.4
65% to 70% 24.3 25.4 23.1 26.9 22.8 21.9
70% to 75% 1.0 2.2 1.9 2.7 1.4 1.6
Over 75% 2.3 1.8 2.3 1.4 1.3 1.2
100.0 100.0 100.0 100.0 100.0 100.0
The average LTGDV cover at the period end was 62.1% (31 March 2021: 62.4%, 30
September 2021: 61.7%).
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.
At 31 March 2022, the development finance portfolio comprised 275 accounts
(31 March 2021: 223, 30 September 2021: 247) with a total carrying value of
£672.9m (31 March 2021: £552.3m, 30 September 2021: £608.2m). Of these
accounts, only 4 were included in Stage 2 at 31 March 2022 (31 March 2021: 8,
30 September 2021: 10), with 2 accounts included as Stage 3 (31 March 2021:
1, 30 September 2021: none). In addition, one acquired account had been
classified as POCI (31 March 2021: 1, 30 September 2021: 1). An allowance for
these losses 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.
31 March 31 March 30 September 2021
2022 2021
% % %
East Anglia 2.5 5.0 3.6
East Midlands 9.3 3.3 6.3
Greater London 7.7 8.9 6.1
North 1.2 2.1 2.4
North West 0.9 0.9 1.1
South East 50.5 57.4 57.5
South West 15.2 15.4 13.5
West Midlands 6.6 4.9 4.8
Yorkshire and Humberside 4.9 0.9 3.5
Total England 98.8 98.8 98.8
Northern Ireland - - -
Scotland 1.2 1.2 1.2
Wales - - -
100.0 100.0 100.0
Asset finance and Motor finance
Asset finance customers are generally small or medium sized businesses. The
nature of the assets underlying the Group's asset finance lending, including
loans financed through CBILS, by gross carrying value is set out below.
31 March 31 March 30 September
2022 2021 2021
% % %
Commercial vehicles 35.9 33.2 33.4
Construction plant 33.8 32.8 34.2
Technology 4.6 6.6 7.0
Manufacturing 6.7 6.7 6.2
Refuse disposal vehicles 4.2 5.2 2.3
Other vehicles 4.6 4.1 4.3
Print and paper 1.9 3.1 4.3
Agriculture 2.7 2.9 3.1
Other 5.6 5.4 5.2
100.0 100.0 100.0
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 presented below.
31 March 31 March 2021 30 September 30 September 2020
2022 2021
Number of transactions 8 7 8 8
Total facilities (£m) 203.0 121.8 185.5 139.0
Carrying value (£m) 171.7 82.6 118.9 94.9
The maximum advance under these facilities was 90% 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 customers 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 31 March 2022 all of these facilities were identified as Stage 1. At 31
March 2021 two facilities were identified as Stage 2 (30 September 2021: 1)
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 CBIL scheme.
Interest and fees are paid by the UK Government for the first twelve months
and the government guarantees 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, after the application of any
proceeds from the asset financed (if applicable), on applications received
before 1 January 2022 and up to 70% for applications received thereafter.
The Group's outstanding RLS, CBILS and BBLS loans at 31 March 2022 were:
31 March 31 March 30 September
2022 2021 2021
£m £m £m
RLS
Term loans 0.3 - 0.1
Asset finance 39.1 - 20.7
Total RLS 39.4 - 20.8
CBILS
Term loans 22.1 29.3 28.1
Asset finance 28.3 15.6 29.9
Total CBILS 50.4 44.9 58.0
BBLS 4.5 5.2 5.0
Total 94.3 50.1 83.8
At 31 March 2022, £0.1m of this balance was considered to be non-performing
(30 September 2021: £0.2m).
Unsecured consumer loans
Almost all 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 have been comfortably 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 31 March 2022, 31 March
2021 and 30 September 2021, compared to the industry averages at those dates
published by UK Finance ('UKF') and the Finance and Leasing Association
('FLA'), was:
31 March 31 March 2021 30 September 2021
2022
% % %
First mortgages
Accounts more than three months in arrears
Buy-to-let accounts including receiver of rent cases 0.15 0.22 0.21
Buy-to-let accounts excluding receiver of rent cases 0.11 0.19 0.14
Owner-occupied accounts 4.13 4.06 4.48
UKF data for mortgage accounts more than three months in arrears
Buy-to-let accounts including receiver of rent cases 0.46 0.57 0.47
Buy-to-let accounts excluding receiver of rent cases 0.42 0.54 0.45
Owner-occupied accounts 0.85 1.01 0.94
All mortgages 0.77 0.92 0.85
Second charge mortgage loans
Accounts more than 2 months in arrears
All accounts 20.13 15.74 19.08
Post-2010 originations 1.50 1.00 1.18
Legacy cases 23.89 22.18 23.12
Purchased assets 26.03 19.22 24.76
FLA data for second mortgages 8.10 8.90 8.60
Motor finance loans
Accounts more than 2 months in arrears
All accounts 3.37 4.69 4.15
Originated cases 2.20 2.25 2.30
Purchased assets 12.93 13.69 14.07
FLA data for consumer point of sale hire purchase 3.30 * 3.30
Asset finance loans
Accounts more than 2 months in arrears 0.21 0.86 0.27
FLA data for business lease/hire purchase loans 0.90 1.00 0.70
* No measure published
No published industry data for asset classes comparable to the Group's other
books has been identified. Where revised data at 31 March 2021 or 30 September
2021 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 factoring activities as the structure of the products means that such a
measure is not relevant.
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 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 second charge mortgages loans include 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
In the debt purchase industry, Estimated Remaining Collections ('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 some 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 assets are set out below. These are derived from the same
models and assumptions used in the effective interest rate calculations. ERCs
are set out both for all purchased consumer portfolios and for those
classified as POCI under IFRS 9.
31 March 31 March 30 September 30 September 2020
2022 2021 2021
£m £m £m £m
All purchased consumer assets
Carrying value 164.3 208.9 185.2 235.3
84 month ERCs 195.3 249.0 221.2 277.8
120 month ERCs 212.3 277.7 245.2 313.7
POCI assets only
Carrying value 102.2 126.1 113.2 139.8
84 month ERCs 127.8 160.8 143.9 176.9
120 month ERCs 142.3 182.3 163.4 203.7
Amounts shown include loans disclosed as consumer loans and first mortgages
(note 10).
SELECTED NOTES TO THE ACCOUNTS - BASIS OF PREPARATION
For the six months ended 31 March 2022 (Unaudited)
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 condensed financial information.
They also include other information describing how the condensed financial
information has been prepared required by legislation and accounting
standards.
28. ACCOUNTING POLICIES
The condensed financial statements are presented in accordance with the
requirements of International Accounting Standard 34 - 'Interim Financial
Reporting'.
The condensed financial statements are required to be prepared as the basis of
the accounting policies expected to be used in the production of the financial
statements for the year.
The Group is required, by the Companies Act 2006 and the Listing Rules of the
FCA, to prepare its financial statements for the year ending 30 September 2022
in accordance with international accounting standards' as adopted in the
United Kingdom. In the financial years reported on this also means, in the
Group's circumstances, that the financial statements also accord with IFRS as
approved by the International Accounting Standards Board.
In previous periods financial statements had been prepared under EU endorsed
IFRS, however the change of framework does not change the substance of the
requirements applying to the Group and no prior-year restatement of the
financial statements is required.
The accounting policies adopted in the current year are therefore the same as
those set out in the 2021 Annual Report and Accounts of the Group.
The Group has historically chosen to present an additional comparative balance
sheet.
New and revised reporting standards
New reporting 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 2021.
29. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The critical accounting estimates and judgements affecting the condensed
financial information are the same as those described in notes 62 and 63 to
the accounts of the Group for the year ended 30 September 2021.
The current state of the UK economy continues to have a significant impact on
the reliability of these estimates. The potential for any resurgence in Covid,
the building pressures on the cost of living and doing business in the UK from
increasing interest rates and inflationary pressures and the global economic
effects of the conflict in Ukraine all contribute to the inherent uncertainty
surrounding any estimates which attempt to model the future economic behaviour
of business and consumers.
(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 probability of
default, 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.
During the Covid pandemic the Group granted certain accounts a period of
payment relief, in accordance with government and regulatory expectations. For
some of these cases an extension to this relief was granted. While no accounts
remain on such reliefs at the period end, the performance of such cases has
been more volatile than general, particularly for accounts granted extended
reliefs. In consequence buy-to-let accounts which had extended payment relief
have been classified as SICR cases.
If additional accounts were determined to have an SICR, these balances would
attract additional impairment provision, as such cases are provided on the
basis of lifetime expected loss, rather the 12-month expected loss, and the
overall provision charge would be higher. Conversely, if cases are incorrectly
identified as SICR, impairment provisions will be overstated. Furthermore,
adjustments to current PD estimates in the Group's models may also have the
effect of identifying more or less accounts as having an SICR.
More information on the definition of SICR adopted is given in note 11.
(b) 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
(which might include 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.
In the current economic situation this process is made more complex by both
the elevated level of uncertainties and the lack of recent experience of
similar situations against which to benchmark. At the same time, the level to
which Covid-related 'scarring' has yet to manifest itself in credit metrics is
still unclear.
The accuracy of the impairment calculations will 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 31
March 2022 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 differing opinions
amongst economists about the longer-term prospects for the UK, which have
diverged again over the period since September 2021, with both UK economic and
geopolitical uncertainties building.
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 HPI
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 economic situations can arise which lie outside the range of
situations considered when it originally derived its IFRS 9 approach to
impairment and which informed the development of its impairment models. It is
considered that the current forecast scenarios, which include higher rates of
interest and inflation than in the historically observed data represent
situations of this kind. The Group 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.
The position after considering all these matters is set out in note 11,
together with further information on the Group's approach. The economic
scenarios referred to above and their impact on the overall provision are set
out in that note.
(c) 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 impact of 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
£11.9m (30 September 2021: £12.0m), while an increase of the assumed asset
lives of such assets by three months would increase balance sheet assets by
£12.0m (30 September 2021: £12.1m).
· 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 £9.8m (30 September 2021: £11.2m).
· A reduction (or increase) in estimated cash flows from purchased loan
assets of 5% would reduce (or increase) balance sheet assets by £6.1m (30
September 2021: £7.1m).
As any of these changes would, in reality, be accompanied by movements in
other factors, actual outcomes may differ from these estimates.
(d) Impairment of goodwill
The carrying value of goodwill recognised on acquisitions is validated by use
of an impairment test based on the projected cash flows for the CGU, based on
management forecasts and other assumptions including a discount factor.
The accuracy of this impairment calculation would be compromised by any
differences between the forecasts used and the levels of business activity
that the CGU is able to achieve in practice. The potential impacts of Covid
scarring and wider economic uncertainties in the UK mean that there is a
greater risk of inaccuracy in compiling these forecasts. 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.
30. Going concern basis
The condensed financial information for the half year has been prepared on the
going concern basis.
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 applicable to half-yearly
reporting.
Particular focus is given to the Group's financial forecasts for this period
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 this half-yearly report.
The business activities of the Group, its current operations and those factors
likely to affect its future results and development, together with a
description of its financial position and funding position, are described in
the Interim Management Report on pages 4 to 57. The principal risks and
uncertainties affecting the Group in the forthcoming six months are described
on pages 158 to 163.
Note 53 to the 2021 Group Accounts includes an analysis of the Group's
regulatory and working capital position and policies, while notes 54 to 57
include a detailed description of its funding structures, its use of financial
instruments, its financial risk management objectives and policies and its
exposure to credit, interest rate and liquidity risk. Notes 62 and 63 to those
accounts discusses critical accounting judgements and estimates affecting the
results and financial position disclosed therein. The position and policies
described in these notes remain materially unchanged to the date of this
half-yearly report, subject to the changes in funding described in note 15.
Financial forecasts
The Group has a formalised process of budgeting, reporting and review. The
Group's planning procedures forecast its profitability, capital position,
funding requirement and cash flows. Detailed plans are produced for two year
periods with longer-term forecasts covering a five year period which include
detailed income forecasts. These plans provide information to the directors
which is used to ensure the adequacy of resources available for the Group to
meet its business objectives, both on a short-term and strategic basis.
The Group makes extensive use of stress testing in compiling and reviewing its
forecasts. This stress testing approach was recently reviewed in detail as
part of the annual Internal Capital Adequacy Assessment Process ('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:
· An increase of 20% in buy-to-let 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 illustrates the impact of a significant prolonged
margin squeeze on profitability and whether this would cause significant
impacts on any capital, liquidity or encumbrance ratios
· A 50% reduction in the growth of development finance portfolio
coupled with a 50bp reduction in margins. Development finance is the highest
yielding product, and this scenario illustrates the effect of product mix on
contribution and other ratios
· A doubling of redemption rates for buy-to-let mortgages reaching the
end of their fixed rate period. This illustrates the potential risk inherent
in the five-year fixed rate business which will mature in 2022 and beyond
· Increased economic stress on customers ‑ as well as modelling the
impact of each of the economic scenarios set out in note 11 across the
forecast horizon, the severe economic scenario was also modelled over the five
year horizon. To ensure this represented a worst-case scenario all other
assumptions were held steady, although in reality adjustments to new business
appetite and other factors would be made
· Combined downside stress - the half-year IFRS9 downside economic
scenario described in note 11 was modelled out for the plan horizon with new
business volumes lowered by 15% and the cost of new deposits increased 10
basis points. This presented a plausible set of adverse factors to the
business model with a prolonged tail-risk
These stresses did not include 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
assessment. Under all of these scenarios, the Group was able 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 started the 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.
Availability of funding and liquidity
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 £9,853.7m (note 14) are repayable within five
years, with 81.0% (£7,983.1m) of this balance 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 31 March 2022, Paragon Bank held £1,257.7m
of balance sheet assets for liquidity purposes, all of which comprised central
bank deposits (note 9). A further £150.0m of liquidity was provided by the
long/short repo arrangement described in the Group's 2021 Annual Report and
Accounts. This brings the total available to £1,407.7m.
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 Individual Liquidity Adequacy Assessment Process ('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 further drawings of £2,066.2m. 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 31 March 2022 the Group had £464.4m (30 September 2021:
£529.2m) of such notes available for use, of which £222.3m were rated AAA
(30 September 2021: £287.0m). The available AAA notes would give access to
£179.1m (30 September 2021: £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 period, the market remains active and the
Group maintains the infrastructure required to access it.
The earliest maturity of any of the Group's working capital debt is in August
2024, when a retail bond issue of £112.5m matures. All central bank
borrowings mature in 2025.
The Group's access to debt is also enhanced by its corporate rating, upgraded
to BBB+ by Fitch Ratings in March 2022, and its status as an issuer is
evidenced by the upgraded BBB-, investment grade, rating of its £150.0m
Tier-2 Bonds. 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's cash analysis continues to show strong free cash balances, even
after allowing scope for significant discretionary cash outflows and capital
distributions.
As described in note 26, the Group's capital base is subject to consolidated
supervision by the PRA. Its capital at 31 March 2022 was in excess of
regulatory requirements and group forecasts show this continuing to be the
case.
Going Concern assessment
In order to assess the appropriateness of the going concern basis the
directors considered the Group's financial position, the cash flow
requirements laid out in its forecasts, its access to funding, the assumptions
underlying the forecasts and potential risks affecting them.
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 this half-yearly report and consequently that it was
appropriate for them to continue to adopt the going concern basis in preparing
the half-yearly financial information for the Group.
31. 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 a fair
value hierarchy reflecting 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 period ended 31 March
2022 or the year ended 30 September 2021 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 period.
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 31 March 31 March 30 September 2021
2022 2021
£m £m £m
Financial assets
Derivative financial assets 12 201.7 180.7 44.2
201.7 180.7 44.2
Financial liabilities
Derivative financial liabilities 12 32.5 76.2 43.9
Contingent consideration 16 1.9 11.5 7.5
34.4 87.7 51.4
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 SONIA (and formerly LIBOR)
benchmark interest rates for the currencies in which the instruments are
denominated, being sterling, euros and dollars. The cross-currency basis
swaps, which were terminated during 2021, had a notional principal related to
the outstanding currency borrowings and therefore the estimated rate of
repayment of these notes also affected the valuation of the swaps. However,
the 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 contingent considerations 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 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 liabilities held at amortised cost,
determined in accordance with the methodologies set out in this note are
summarised below.
31 March 2022 31 March 2021 30 September 2021
Carrying amount Fair value Carrying amount Fair Carrying amount Fair
value
value
£m £m £m £m £m £m
Financial assets
Cash 1,500.4 1,500.4 2,103.0 2,103.0 1,360.1 1,360.1
Loans to customers 13,914.9 13,966.9 12,816.3 12,854.9 13,402.7 13,470.6
Sundry financial assets 32.2 32.2 86.0 86.0 65.7 65.7
15,447.5 15,499.5 15,005.3 15,043.9 14,828.5 14,896.4
Financial liabilities
Short term bank borrowings 0.4 0.4 0.1 0.1 0.3 0.3
Asset backed loan notes 477.1 477.1 2,011.3 2,011.3 516.0 516.0
Secured bank borrowings 871.3 871.3 755.7 755.7 730.0 730.0
Retail deposits 9,853.7 9,844.1 8,631.2 8,676.6 9,300.4 9,308.5
Corporate and retail bonds 261.3 275.2 405.3 428.3 386.1 411.9
Other financial liabilities 131.7 131.7 72.3 72.3 66.3 66.3
11,595.5 11,599.8 11,875.9 11,944.3 10,999.1 11,033.0
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.
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.
ADDITIONAL FINANCIAL INFORMATION (APPENDICIES)
For the six months ended 31 March 2022 (not covered by the Independent Review
Report)
Additional financial information supporting the amounts shown in the interim
management report but not forming part of the condensed financial statements.
A. UNDERLYING PROFIT
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.
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.
31 March 31 March 30 September 2021
2021
2022
£m £m £m
Profit on ordinary activities before tax 143.6 96.4 213.7
Add back: Fair value adjustments (38.1) (13.5) (19.5)
Underlying profit 105.5 82.9 194.2
Underlying basic earnings per share, calculated on the basis of underlying
profit charged at the overall effective tax rate, is derived as follows:
31 March 31 March 2021 30 September 2021
2022
£m £m £m
Underlying profit 105.5 82.9 194.2
Tax at effective rate (note 7) (25.3) (19.1) (44.7)
Underlying earnings 80.2 63.8 149.5
Basic weighted average number of shares (note 8) 245.7 253.3 252.3
Underlying earnings per share 32.6p 25.2p 59.3p
Underlying return on tangible equity is derived using underlying earnings
calculated on the same basis.
Six months to Six months to 31 March Year to
2021
31 March 30 September 2021
2022
£m £m £m
Underlying earnings 80.2 63.8 149.5
Amortisation of intangible assets 1.0 1.0 2.0
Adjusted underlying earnings 81.2 64.8 151.5
Average tangible equity (note 26(b)) 1,090.5 1,009.6 1,028.7
Underlying RoTE (annualised) 14.9% 12.8% 14.7%
B. INCOME STATEMENT RATIOS
Net interest margin ('NIM') and cost of risk (impairment charge as a
percentage of average loan balance) for the Group and its segments are
calculated as shown.
Six months to 31 March 2022
Mortgage Commercial Lending Idem Total
Lending Capital
£m £m £m £m
Opening loans to customers
(note 10) 11,608.7 1,568.8 225.2 13,402.7
Closing loans to customers (note 10) 11,999.2 1,719.7 196.0 13,914.9
Average loans to customers 11,804.0 1,644.2 210.6 13,658.8
Net interest 122.1 53.9 8.3 175.2
NIM (annualised) 2.07% 6.56% 7.88% 2.57%
Impairment provision (1.0) 3.2 (0.9) 1.3
Cost of risk (annualised) (0.02)% 0.39% (0.85)% 0.02%
Six months to 31 March 2021
Mortgage Commercial Lending Idem Total
Lending Capital
£m £m £m £m
Opening loans to customers 10,819.5 1,514.8 297.1 12,631.4
(note 10)
Closing loans to customers (note 10) 11,130.6 1,427.1 258.6 12,816.3
Average loans to customers 10,975.0 1,471.0 277.9 12,723.9
Net interest 103.1 46.5 10.8 147.5
NIM (annualised) 1.88% 6.32% 7.77% 2.32%
Impairment provision 4.9 1.3 (0.2) 6.0
Cost of risk (annualised) 0.09% 0.18% (0.14)% 0.09%
Year to 30 September 2021
Mortgage Lending Commercial Lending Idem Total
Capital
£m £m £m £m
Opening loans to customers 10,819.5 1,514.8 297.1 12,631.4
(note 10)
Closing loans to customers (note 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 (5.9) 2.9 (1.7) (4.7)
Cost of risk (0.05)% 0.19% (0.65)% (0.04)%
Not all net interest is allocated to segments (see note 2).
C. COST:INCOME RATIO
Cost:income ratio is derived as follows:
31 March 31 March 30 September 2021
2021
2022
Operating expenses (£m) 74.9 65.8 135.4
Total operating income (£m) 181.7 154.7 324.9
Cost / Income 41.2% 42.5% 41.7%
D. Net asset value
Note 31 March 31 March 30 September 2021
2022 2021
Total equity (£m) 1,279.7 1,203.8 1,241.9
Outstanding issued shares (m) 18 250.5 262.0 262.5
Treasury shares (m) 20 (5.0) (5.2) (12.1)
Shares held by ESOP schemes (m) 20 (4.0) (3.1) (3.7)
241.5 253.7 246.7
Net asset value per £1 ordinary share £5.30 £4.74 £5.03
Tangible equity (£m) 26 1,109.6 1,033.3 1,071.4
Tangible net asset value per £1 ordinary share
£4.59 £4.07 £4.34
PRINCIPAL RISKS AND UNCERTAINTIES
There are a number of potential risks and uncertainties which could have a
material impact on the Group's performance over the remaining six months of
the financial year and could cause actual results to differ materially from
expected and historical results. The uncertainties around the longer‑term
impacts of the pandemic continue to be identified and assessed but overall in
the opinion of the directors these have not changed materially from those
described in Section A2.2 of the Annual Report and Accounts of the Group for
the year ended 30 September 2021.
The pandemic impacts Group's assessment of its exposure under almost all the
categories within its risk management framework. The effects on both the Group
and the wider UK and global economy continue to be quantified and the Group is
monitoring closely how this impacts the overall risk profile. Given the
uncertainties about the length of the pandemic, the evolving government and
fiscal response and the impacts on customers and staff, the Group continues to
assess its principal risks in light of the changing operating environment.
The principal risks are summarised below.
Category Risk Description
Capital Capital resources Overall capital resources fail to meet regulatory or business requirements
The risk that there is or will be insufficient capital to operate effectively
including meeting minimum regulatory requirements, operating within
board‑approved risk appetite and supporting the Group's strategic goals
Capital requirements Failure to adequately meet or define overall capital requirements in line with
business requirements
Liquidity and Funding Funding concentration Risk due to concentration of funding in particular products, delivery
channels, markets and terms
The risk that the Group has insufficient financial resources to enable it to
meet its obligations as they fall due, cannot raise or maintain sufficient
funds to finance its future plans, or can only secure such resources at
excessive cost, and / or encumbrance.
Funding tenor Risk to the maturity structure of the Group's funding due to external,
internal or contractual events
Market Duration Arises from assets and liabilities being linked to the same interest rate
indices, but re-pricing at different dates
The risk of changes in the net value of, or net income arising from, the
Group's assets and liabilities from adverse movements in market prices. The
Group does not have a trading book, but the risk arises in the banking book
Basis Arises from assets and liabilities linked to different rate indices which do
not move in tandem
Optionality Arises as the settlement of assets and liabilities is sometimes different from
originally forecast
Foreign exchange ('FX') Risk that changes in the relative value of currencies could result in
financial loss
Credit Customer The risk that the Group is exposed to unexpected material losses from the
failure to screen potential borrowers, underwrite new business, and manage
The risk of financial loss arising from a borrower or counterparty failing to repayments effectively
meet their financial obligations to the Group when they fall due
Concentration The risk of loss that might occur from higher proportions of exposure within
any area of lending or operation. The Group monitors and controls
concentrations of loans, to amongst others, business lines, geographic
regions, groups of customers and types of collateral
Collateral The risk of financial loss occurring as the result of property or assets
secured against debt owed to the Group reducing in value beyond expected
tolerances
Wholesale counterparty The risk of failure of an institution holding the Group's investments or
providing hedging facilities for risk mitigation which could expose the bank
to loss or liquidity issues
Outsourcer default The risk that, as a result of the Group outsourcing material activities to a
third-party supplier, the Group is exposed to financial loss on the failure of
that provider
Model Assumptions The risk of an error in assumptions made anywhere in the model lifecycle,
covering scope, data sourcing, development, testing, validation,
The risk that the Group may make incorrect decisions based on the output of implementation and maintenance which results in incorrect decisioning
internal models, due to errors in the development, implementation or use of
such models resulting in a loss or misreporting within financial statements
Operation The risk that a model which has been scoped, developed, implemented and
executed as expected, may produce incorrect reporting, if its use is not
controlled, or it is not operated in a safe, reliable and controlled
environment
Reputational Brand The risk of deterioration in the inherent value of the Group's brand equity
through adverse publicity, which may result in an adverse impact on share
The risk of negative consequences arising from a failure to meet the price or loss of competitive advantage
expectations and standards of the Group's customers, investors, regulators or
other counterparties whilst undertaking business activities
Corporate responsibility The risk that the Group's corporate responsibility approach does not promote
commitment to practice environmental and social sustainability in the
environmental and social landscapes in which it operates therefore creating
negative consequences to the perception of the Group
Strategic Corporate plan design The risk that the design of the plan does not reflect the strategic priorities
and doesn't adequately take account of and align to the prevailing external
The risk that the corporate plan does not fully align to, and support, the environment
Group's strategic priorities or is not executed effectively as a result of
external factors, incorrect planning assumptions or insufficient or inadequate
resources
Corporate plan delivery The risk that the corporate plan is not effectively executed or is not
resilient to the changing external environment
Business The risk that the Group is adversely exposed to factors either externally and
/ or by lack of innovation and overambitious targets that lower its profits or
cause it to fail
Political The risk that political decisions, economic action / inaction, events, or
conditions significantly affect the Group or its market sectors, profitability
or value
Acquisition The failure to target appropriate acquisitions or manage effectively the
transition and implementation risks resulting from material corporate
acquisitions which may impact adversely on the Group's performance
Climate Change Physical The risk to the Group, its market sectors and supply chain of business
disruption and loss caused by more frequent or severe man-made weather events
The risk of climate changes impacting the Group either directly or indirectly such as flooding, droughts and storms
through its third-party relationships. This includes the transitional risk to
Paragon's strategy and profile through moving to a low carbon environment and
any physical risks arising from changes to the natural environment
Transitional The risk that the speed of transition towards a greener economy may have a
significantly adverse effect on the Group's asset values and / or the cost of
doing business
Conduct Customer fair outcomes The risk that the Group fails to put customers at the centre of how the
business is run, culturally, strategically and operationally, failing to meet
The risk that the Group's culture drives poor behaviours or decision making in their needs and potentially leading to detrimental outcomes
the execution of its business activities which leads to failure to achieve
fair outcomes for customers and / or the ability to demonstrate the Group is
acting with integrity in the market
Market integrity and effective competition The risk that the Group enters into transactions or new target markets that
fail to deliver effective competition for consumers, or the Group fails to
implement systems and controls that protect the soundness of financial markets
and ensure the integrity of those transactions
Operational People Failure of the Group to recruit, retain, develop and effectively lead / manage
its people
The risk of financial and non- financial detriment resulting from inadequate
or failed internal procedures, people and systems or from external events
Health and safety Non-adherence to legislation and regulation in order to ensure the health,
safety and welfare of employees, contractors, visitors and members of the
public
Property Property owned or occupied by the Group is subject to unauthorised access,
physical damage or loss of services adversely affecting the effective
operation of the business
Third party Risk associated with the selection, procurement and delivery of goods and
services from third party suppliers, and ensuring that their ongoing
management is in line with the Group's legal, regulatory and commercial
obligations
Information technology The Group's IT infrastructure and systems are unable to support its
operational needs, including failure to adequately protect against the threat
of cyber-crime
End user computing Risk associated with applications that are not managed and developed in a
standard IT development environment
Change Poor implementation of business change including projects and programmes
delivering new or amended processes, products or IT systems
Transaction processing Poorly executed regular business transactions resulting in customer detriment
and / or financial loss
Regulatory compliance Failure to adhere to the legislation, regulations and guidelines relevant to
the Group, leading to regulatory censure, fines, legal recourse and the
inability to carry out business as usual
Legal Failure to act according to the law, meet contractual obligations, and manage
disputes as a Group or with its customers or third parties
Data Protection Failure to comply with data protection obligations with respect to
confidentiality, integrity and availability leading to large fines and
significant reputational damage
Financial crime Failure to detect and / or prevent the Group from falling victim to offences
of fraud, theft and money laundering across establishments, products and
services. Failure to fulfil regulatory and legal obligations on all aspects of
financial crime legislation and to prevent any form of potential bribery,
corruption or terrorist fundraising through normal business activity
Corporate governance Failure of the processes and structures by which the Group is directed and
controlled by its Board of Directors, executive management, business units and
support functions. This results in inappropriate management information to
enable effective decision making
Financial control and reporting Incorrect accounting, reporting and financial management resulting in
financial misstatement, poor decision making and associated losses for the
Group
The Group has considered and responded to all these risks, mitigating the
exposure as far as is practicable to ensure that its risk profile remains
within the Board's stated risk appetite.
CAUTIONARY STATEMENT
Sections of this Half-yearly Report, including but not limited to the Interim
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; acts of terrorism and other acts of hostility or war and responses
to, and consequences of, those acts; 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 Half-yearly Report should be construed as a profit forecast.
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