REG - Paragon Grp Co PLC - Half-year Report <Origin Href="QuoteRef">PARA.L</Origin> - Part 3
23/05/2017 07:07
- Part 3: For the preceding part double click ID:nRSW8984Fb
Listing 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.
PANDORA SHARP
Company Secretary
23 May 2017
Board of Directors
Robert G Dench John A Heron Peter J N Hartill
Nigel S Terrington Fiona J Clutterbuck Hugo R Tudor
Richard J Woodman Alan K Fletcher
The Paragon Group of Companies PLC
CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT
For the six months ended 31 March 2017 (Unaudited)
Note Six months to Six months to Year to
31 March2017 31 March2016 30 September 2016
£m £m £m
Interest receivable 7 203.8 203.4 411.4
Interest payable and similar charges 8 (90.3) (93.6) (188.2)
Net interest income 113.5 109.8 223.2
Other leasing income 7.6 5.6 13.0
Related costs (5.5) (2.5) (10.0)
Net leasing income 2.1 3.1 3.0
Other income 9 8.1 9.4 17.8
Other operating income 10.2 12.5 20.8
Total operating income 123.7 122.3 244.0
Operating expenses (50.4) (49.4) (92.5)
Provisions for losses (3.2) (3.5) (7.7)
Operating profit before fair value items 70.1 69.4 143.8
Fair value net (losses) / gains 10 (0.7) 0.1 (0.6)
Operating profit being profit on ordinary activities before taxation 69.4 69.5 143.2
Tax charge on profit on ordinary activities 11 (13.0) (13.6) (27.2)
Profit on ordinary activities after taxation 56.4 55.9 116.0
Note Six months to Six months to Year to
31 March2017 31 March2016 30 September 2016
Basic earnings per share 12 20.5p 19.1p 40.5p
Diluted earnings per share 12 19.9p 18.8p 39.7p
Dividend - rate per share for the period 21 4.7p 4.3p 13.5p
The results for the periods shown above relate entirely to continuing operations.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the six months ended 31 March 2017 (Unaudited)
Note Six months to Six months to Year to
31 March2017 31 March2016 30 September 2016
£m £m £m
Profit for the period 56.4 55.9 116.0
Other comprehensive income / (expenditure)
Items that will not be reclassified subsequently to profit or loss
Actuarial gain / (loss) on pension plan 26 20.7 (2.7) (37.2)
Tax thereon (3.9) 0.5 6.8
16.8 (2.2) (30.4)
Items that may be reclassified subsequently to profit or loss
Cash flow hedge (losses) / gains taken to equity (0.6) 1.5 5.0
Tax thereon 0.1 (0.3) (1.0)
(0.5) 1.2 4.0
Other comprehensive income / (expenditure) for the period net of tax 16.3 (1.0) (26.4)
Total comprehensive income for the period 72.7 54.9 89.6
CONSOLIDATED BALANCE SHEET
31 March 2017 (Unaudited)
31 March 2017 31 March 2016 30 September 2016 30 September 2015
Note £m £m £m £m
Assets employed
Non-current assets
Intangible assets 13 104.6 87.0 105.4 7.7
Property, plant and equipment 43.0 36.7 39.2 22.1
Financial assets 14 11,991.7 11,800.3 12,116.4 10,745.8
12,139.3 11,924.0 12,261.0 10,775.6
Current assets
Other receivables 18.4 9.5 12.7 6.2
Short term investments 17 - 17.3 7.1 41.1
Cash and cash equivalents 18 1,173.6 895.3 1,237.6 1,056.0
1,192.0 922.1 1,257.4 1,103.3
Total assets 13,331.3 12,846.1 13,518.4 11,878.9
Financed by
Equity shareholders' funds
Called-up share capital 19 296.5 309.6 295.9 309.3
Reserves 20 783.4 793.4 736.1 760.2
Share capital and reserves 1,079.9 1,103.0 1,032.0 1,069.5
Own shares 22 (85.7) (138.6) (62.5) (100.0)
Total equity 994.2 964.4 969.5 969.5
Current liabilities
Financial liabilities 23 1,679.4 809.5 1,128.3 339.6
Current tax liabilities 15.3 16.7 16.7 12.5
Other liabilities 54.4 63.3 56.3 43.0
1,749.1 889.5 1,201.3 395.1
Non-current liabilities
Financial liabilities 23 10,521.2 10,958.4 11,264.8 10,481.4
Retirement benefit obligations 26 38.4 24.0 58.4 21.5
Deferred tax 5.3 8.1 2.0 11.3
Other liabilities 23.1 1.7 22.4 0.1
10,588.0 10,992.2 11,347.6 10,514.3
Total liabilities 12,337.1 11,881.7 12,548.9 10,909.4
13,331.3 12,846.1 13,518.4 11,878.9
The condensed financial statements for the half year were approved by the Board of Directors on 23 May 2017.
CONSOLIDATED CASH FLOW STATEMENT
For the six months ended 31 March 2017 (Unaudited)
Note Six months to Six months to Year to
31 March2017 31 March2016 30 September 2016
£m £m £m
Net cash flow generated by operating activities 27 324.3 243.1 865.2
Net cash generated / (utilised) by investing activities 28 4.9 (285.9) (278.6)
Net cash (utilised) by financing activities 29 (393.1) (118.2) (405.5)
Net (decrease) / increase in cash and cash equivalents (63.9) (161.0) 181.1
Opening cash and cash equivalents 1,236.4 1,055.3 1,055.3
Closing cash and cash equivalents 1,172.5 894.3 1,236.4
Represented by balances within
Cash and cash equivalents 18 1,173.6 895.3 1,237.6
Financial liabilities (1.1) (1.0) (1.2)
1,172.5 894.3 1,236.4
CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY
For the six months ended 31 March 2017 (Unaudited)
Six months ended 31 March 2017
Share capital Share premium Capital redemption reserve Merger reserve Cash flow hedging reserve Profit and loss account Own shares Total equity
£m £m £m £m £m £m £m £m
Transactions arising from
Profit for the year - - - - - 56.4 - 56.4
Other comprehensive income - - - - (0.5) 16.8 - 16.3
Total comprehensive income - - - - (0.5) 73.2 - 72.7
Transactions with owners
Dividends paid (note 21) - - - - - (25.4) - (25.4)
Shares cancelled - - - - - - - -
Own shares purchased - - - - - - (27.0) (27.0)
Shares issued to ESOP - - - - - - - -
Exercise of share awards 0.6 0.9 - - - (3.8) 3.8 1.5
Charge for share based remuneration - - - - - 2.3 - 2.3
Tax on share based remuneration - - - - - 0.6 - 0.6
Net movement in equity in the year 0.6 0.9 - - (0.5) 46.9 (23.2) 24.7
Opening equity 295.9 64.6 13.7 (70.2) 2.1 725.9 (62.5) 969.5
Closing Equity 296.5 65.5 13.7 (70.2) 1.6 772.8 (85.7) 994.2
CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY
For the six months ended 31 March 2017 (Unaudited) (continued)
Six months ended 31 March 2016
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 - - - - - 55.9 - 55.9
Other comprehensive income - - - - 1.2 (2.2) - (1.0)
Total comprehensive income - - - - 1.2 53.7 - 54.9
Transactions with owners
Dividends paid (note 21) - - - - - (21.7) - (21.7)
Shares cancelled - - - - - - - -
Own shares purchased - - - - - - (39.9) (39.9)
Shares issued to ESOP 0.3 - - - - - (0.3) -
Exercise of share awards - - - - - (1.6) 1.6 -
Charge for share based remuneration - - - - - 2.1 - 2.1
Tax on share based remuneration - - - - - (0.5) - (0.5)
Net movement in equity in the year 0.3 - - - 1.2 32.0 (38.6) (5.1)
Opening equity 309.3 64.6 - (70.2) (1.9) 767.7 (100.0) 969.5
Closing Equity 309.6 64.6 - (70.2) (0.7) 799.7 (138.6) 964.4
CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY
For the six months ended 31 March 2017 (Unaudited) (continued)
Year ended 30 September 2016
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 - - - - - 116.0 - 116.0
Other comprehensive income - - - - 4.0 (30.4) - (26.4)
Total comprehensive income - - - - 4.0 85.6 - 89.6
Transactions with owners
Dividends paid (note 21) - - - - - (33.9) - (33.9)
Shares cancelled (13.7) - 13.7 - - (94.0) 94.0 -
Own shares purchased - - - - - - (59.9) (59.9)
Shares issued to ESOP 0.3 - - - - - (0.3) -
Exercise of share awards - - - - - (3.7) 3.7 -
Charge for share based remuneration - - - - - 4.4 - 4.4
Tax on share based remuneration - - - - - (0.2) - (0.2)
Net movement in equity in the year (13.4) - 13.7 - 4.0 (41.8) 37.5 -
Opening equity 309.3 64.6 - (70.2) (1.9) 767.7 (100.0) 969.5
Closing Equity 295.9 64.6 13.7 (70.2) 2.1 725.9 (62.5) 969.5
The Paragon Group of Companies PLC
CONDENSED FINANCIAL STATEMENTS
SELECTED NOTES TO THE ACCOUNTS
For the six months ended 31 March 2017 (Unaudited)
1. GENERAL INFORMATION
The condensed financial statements are prepared for The Paragon Group of Companies PLC and its subsidiary companies ('the
Group') on a consolidated basis.
The condensed financial statements for the six months ended 31 March 2017 and for the six months ended 31 March 2016 have
not been audited, as defined in section 434 of the Companies Act 2006.
The figures shown above for the years ended 30 September 2016 and 30 September 2015 are not statutory accounts. A copy of
the statutory accounts for each year has been delivered to the Registrar of Companies. The auditors reported on those
statutory accounts and their reports were unqualified, did not draw attention to any matters by way of emphasis and did not
contain an adverse statement under sections 498 (2) or 498 (3) of the Companies Act 2006.
A copy of the half-yearly financial report will be posted to those shareholders who have requested to receive one and
additional copies can be obtained from the Company Secretary, The Paragon Group of Companies PLC, 51 Homer Road, Solihull,
West Midlands, B91 3QJ.
This half-yearly financial report is also available on the Group's website at www.paragon-group.co.uk.
2. ACCOUNTING POLICIES
The condensed financial statements are presented in accordance with the requirements of International Accounting Standard
34 - 'Interim Financial Reporting'.
The Group prepares its annual financial statements in accordance with International Financial Reporting Standards as
endorsed by the European Union. The condensed financial statements have been prepared on the basis of the accounting
policies set out in the Annual Report and Accounts of the Group for the year ended 30 September 2016, which are expected to
be used in the preparation of the financial statements of the Group for the year ending 30 September 2017.
The critical accounting estimates and judgements affecting the condensed financial information are the same as those
described in note 5 to the accounts of the Group for the year ended 30 September 2016.
New and revised reporting standards
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 2016.
The Group's IFRS 9 project, described in note 2 of those financial statements, continues to make progress towards the
Group's implementation date for the standard of 1 October 2018. A more detailed report on progress will be given in the
Annual Report and Accounts for the year ending 30 September 2017.
Going concern basis
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 5 to 39. The principal risks and uncertainties affecting the Group in the forthcoming six months
are described on page 40.
Note 6 to the accounts for the year ended 30 September 2016 includes an analysis of the Group's working capital position
and policies, while note 7 includes 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. Note 5 to
those accounts discusses critical accounting 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 25.
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 a rolling 24 month
period with longer term forecasts covering a five year period. 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's securitisation funding structures ensure that both a substantial proportion of its originated loan portfolio
and a significant amount of its acquired Idem Capital assets are match-funded. 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 utilising the Group's available warehouse facilities are refinanced through
securitisation or retail deposits from time to time.
The Group's retail deposits of £2,347.4m (note 24), accepted through Paragon Bank, are repayable within five years, with
63.8% of this balance (£1,498.3m) 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 Committees of the
parent company and Paragon Bank. The Group is required to hold liquid assets in Paragon Bank to mitigate this liquidity
risk. At 31 March 2017 Paragon Bank held £485.5m in liquid assets, shown in the balance sheet as cash (note 18). A further
£108.8m of liquidity was provided by the Bank of England Funding for Lending Scheme, bringing the total to £594.3m.
Paragon Bank manages its liquidity in line with the Board's risk appetite and the requirements of the PRA, which are
formally documented as part of the Bank's approved Individual Liquidity Adequacy Assessment Process ('ILAAP'). 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 give access to an
additional £123.0m of further drawings.
The Group's £110.0m corporate bond was repaid in April 2017, after the balance sheet date. The outstanding principal
balance of the Group's retail bonds at 31 March 2017 was £297.5m, none of which is repayable before December 2020. The Tier
2 Bond issued by the Group in September 2016 matures in 2026.
The Group's cash analysis continues to show strong free cash balances, even after allowing for significant discretionary
cash flows, and its securitisation investments produce significant cash flows.
The Group has demonstrated in the recent past its ability to raise retail bond debt and it has a history of raising new
corporate debt when required. The Group's access to debt is also enhanced by its corporate BBB- rating, reaffirmed by Fitch
Ratings in April 2017, and its status as an issuer is evidenced by the BB+ rating granted to its Tier-2 Bond issue in
September 2016 and subsequently reaffirmed.
At 31 March 2017 the Group had free cash balances of £257.4m immediately available for use (note 18) and would still have
had £146.5m available after setting aside cash for the corporate bond repayment.
As described in note 4 the Group's capital base is subject to consolidated supervision by the PRA. Its capital at 31 March
2017 was in excess of regulatory requirements and group forecasts show this continuing to be the case.
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 those aspects of 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.
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 it was appropriate for them to continue to adopt the going
concern basis in preparing the half-yearly report.
3. Fair values of financial assets and financial liabilities
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 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 2017 or the year ended 30 September 2016
valued using level 3 measurements.
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 is set out below.
a) Assets and liabilities carried at fair value
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 risk adjusted interest rate. The principal inputs to these valuation models are LIBOR
benchmark interest rates for the currencies in which the instruments are denominated, being sterling, euros and dollars.
The cross-currency basis swaps have a notional principal related to the outstanding currency borrowings and therefore the
estimated rate of repayment of these notes also affects the valuation of the swaps. In order to determine the fair values
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. 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 16.
Short term investments
The short term investments described in note 17 are freely traded securities for which a market price quotation is
available and are classified as level 1 measurements.
b) Assets and liabilities carried at amortised cost
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 and an adjustment is required. As these valuation exercises are not wholly market based
they are considered to be level 2 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 redemption rates. Given the mixture of observable and non-observable inputs, these are considered to be level 2
measurements.
Loan assets
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 2 measurements
The fair values for financial assets and liabilities held at amortised cost, other than those where carrying values are so
low that any difference would be immaterial, determined in accordance with the methodologies set out above is summarised
below:
31 March 2017 31 March 2017 31 March 2016 31 March 2016 30 September 2016 30 September 2016
Carrying amount Fair Carrying amount Fair Carrying amount Fair
value value value
£m £m £m £m £m £m
Financial assetsLoans and receivables
Loans to customers 10,940.2 10,970.6 10,853.1 10,867.0 10,737.5 10,754.4
Cash 1,173.6 1,173.6 895.3 895.3 1,237.6 1,237.6
12,113.8 12,144.2 11,748.4 11,762.3 11,975.1 11,992.0
Financial liabilitiesOther liabilities
Asset backed loan notes 7,491.9 7,491.9 8,414.7 8,414.7 8,374.1 8,374.1
Corporate and retail bonds 554.6 583.3 405.0 401.7 554.3 573.3
Retail deposits 2,347.4 2,354.7 1,426.4 1,430.8 1,873.9 1,887.2
Bank loans 1,448.2 1,448.2 1,510.6 1,510.6 1,573.0 1,573.0
11,842.1 11,878.1 11,756.7 11,757.8 12,375.3 12,407.6
4. 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;
and
· 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) Dividend policy
The Company's dividend policy, announced in 2012 has been to target a dividend cover ratio of between 3.0 and 3.5 times by
the end of the financial year ended 30 September 2016. The target of 3.0 times was achieved in respect of the financial
year ended 30 September 2016 and the Company has stated its intention to operate a progressive dividend policy, maintaining
the three times cover ratio going forward. The Company considers that it has sufficient cash resources available to pay
dividends at this level, and that it has abundant distributable reserves for this purpose.
(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.
The Group's consolidated annualised RoTE for the six months ended 31 March 2017 is derived as follows:
31 March 2017 31 March 2016 30 September2016 30 September 2015
£m £m £m £m
Profit for the period 56.4 55.9 116.0 107.1
Amortisation of intangible assets 0.8 0.7 1.6 1.4
Adjusted profit 57.2 56.6 117.6 108.5
Divided by
Opening equity 969.5 969.5 969.5 947.1
Opening intangible assets (105.4) (7.7) (7.7) (7.9)
Opening tangible equity 864.1 961.8 961.8 939.2
Closing equity 994.2 964.4 969.5 969.5
Closing intangible assets (104.6) (87.0) (105.4) (7.7)
Closing tangible equity 889.6 877.4 864.1 961.8
Average tangible equity 876.8 919.6 913.0 950.5
Return on tangible equity 13.5% 12.7% 12.9% 11.4%
(c) Gearing
The Board of Directors regularly review the proportion of working capital represented by debt and equity. Net debt is
calculated as total debt, other than securitised and warehouse debt, valued at principal value, less free cash up to a
maximum of the total debt. Adjusted equity comprises all components of equity (i.e. share capital, share premium, minority
interest, retained earnings, and revaluation surplus) other than amounts recognised in equity relating to cash flow
hedges.
The debt and equity amounts at 31 March 2017 were as follows:
Note 31 March2017 31 March2016 30 September 2016 30 September 2015
£m £m £m £m
Debt
Corporate bond 260.0 110.0 260.0 110.0
Retail bonds 297.5 297.5 297.5 297.5
Bank overdraft 1.1 1.0 1.2 0.7
Less: Applicable free cash 18 (257.4) (152.7) (366.5) (199.9)
Net debt 301.2 255.8 192.2 208.3
Equity
Total equity 994.2 964.4 969.5 969.5
Less: cash flow hedging reserve 20 (1.6) 0.7 (2.1) 1.9
Adjusted equity 992.6 965.1 967.4 971.4
Total working capital 1,293.8 1,220.9 1,159.6 1,179.7
Debt 23.3% 21.0% 16.6% 17.7%
Equity 76.7% 79.0% 83.4% 82.3%
Total working capital 100.0% 100.0% 100.0% 100.0%
(d) Regulatory capital
The Group is subject to supervision by the PRA on a consolidated basis, as a group containing an authorised bank. As part
of this supervision the regulator will issue individual capital guidance setting an amount of regulatory capital, defined
under the international Basel III rules, implemented through the CRD IV, which the Group is required to hold relative to
its risk weighted assets in order to safeguard depositors against the risk of losses being incurred by the Group.
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.
At 31 March 2017 the Group's regulatory capital of £1,021.9m (31 March 2016: £891.9m, 30 September 2016: £1,005.6m) was
comfortably in excess of that required by the regulator. The Group had sufficient regulatory capital throughout the
period.
The Group's regulatory capital differs from its equity as certain adjustments are required by the regulator. A
reconciliation of the Group's equity to its unverified regulatory capital determined in accordance with CRD IV at 31 March
2017 is set out below.
Note 31 March2017 31 March2016 30 September 2016 30 September 2015
£m £m £m £m
Total equity § 994.2 964.4 969.5 969.5
Deductions
Proposed dividend 21 (12.8) (12.2) (25.5) (21.8)
Committed share buy-backs ‡ (10.8) - - -
Intangible assets 13 (104.6) (87.0) (105.4) (7.7)
Deferred tax adjustment * - - - (0.3)
Common Equity Tier 1 ('CET1') capital 866.0 865.2 838.6 939.7
Other tier 1 capital - - - -
Total tier 1 capital 866.0 865.2 838.6 939.7
Corporate bond 260.0 110.0 260.0 110.0
Less: amortisation adjustment † (108.8) (86.8) (97.8) (75.8)
151.2 23.2 162.2 34.2
Collectively assessed credit impairment allowances 4.7 3.5 4.8 2.4
Total tier 2 capital 155.9 26.7 167.0 36.6
Total regulatory capital 1,021.9 891.9 1,005.6 976.3
§ Including results for the six months ended 31 March 2017 and therefore unverified for regulatory purposes.
‡ Buy-backs for which irrevocable purchase authority has been given to the Group's brokers under the share buy-back
programme.
* Deferred tax assets in subsidiary companies are required to be deducted from regulatory capital. This balance is
offset against the deferred tax liability in the consolidated accounts.
† When tier 2 capital instruments have less than five years to maturity the amount eligible as regulatory capital
reduces by 20% per annum on a straight line basis. The Group's £110.0m Corporate Bond matured in April 2017 and therefore
such an amortisation adjustment is required.
The total risk exposure calculated under the CRD IV framework, against which this capital is held, and the proportion of
this exposure it represents, are calculated as shown below.
31 March2017 31 March2016 30 September 2016
£m £m £m
Credit risk
Balance sheet assets 4,847.0 4,860.9 4,728.4
Off balance sheet 89.5 65.7 51.5
Total credit risk 4,936.5 4,926.6 4,779.9
Operational risk 445.7 409.7 445.7
Market risk - - -
Other 59.4 53.6 61.9
Total risk exposure 5,441.6 5,389.9 5,287.5
Solvency ratios % % %
CET1 15.9 16.1 15.9
Total regulatory capital 18.8 16.5 19.0
This table not covered by the Independent Review Report
The CRD IV risk weightings for credit risk exposures are calculated using the Standardised Approach. Operational risk is
calculated using the Basic Indicator Approach.
The table below shows the calculation of the UK leverage ratio, based on the consolidated balance sheet assets adjusted as
shown below:
Note 31 March2017 31 March2016 30 September 2016
£m £m £m
Total balance sheet assets 13,331.3 12,846.1 13,518.4
Less: Derivative assets 16 (1,044.0) (939.9) (1,366.4)
Central bank deposits 18 (408.5) (81.5) (315.0)
On-balance sheet items 11,878.8 11,824.7 11,837.0
Less: Intangible assets 13 (104.6) (87.0) (105.4)
Total on balance sheet exposures 11,774.2 11,737.7 11,731.6
Derivative assets 16 1,044.0 939.9 1,366.4
Potential future exposure on derivatives 217.7 71.2 68.6
Total derivative exposures 1,261.7 1,011.1 1,435.0
Post offer pipeline at gross notional amount 458.9 292.9 273.8
Adjustment to convert to credit equivalent amounts (229.5) (146.4) (136.9)
Off balance sheet items 229.4 146.5 136.9
Tier 1 capital 866.0 865.2 838.6
Total leverage exposure 13,265.3 12,895.3 13,303.5
UK leverage ratio 6.5% 6.7% 6.3%
This table not covered by the Independent Review Report
The regulatory capital disclosures in these financial statements relate only to the consolidated position for the Group.
Individual entities within the Group are also subject to supervision on a standalone basis. All such entities complied with
the requirements to which they were subject during the 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.
5. 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. There are no significant concentrations of
credit risk to individual counterparties due to the large number of customers included in the portfolios.
The Group's loan assets at 31 March 2017, 31 March 2016 and 30 September 2016 are analysed as follows:
31 March 2017 31 March 2016 30 September 2016
£m % £m % £m %
Buy-to-let mortgages 9,700.0 88.7% 9,736.3 89.7% 9,621.2 89.6%
Owner occupied mortgages 17.2 0.2% 25.0 0.2% 19.4 0.2%
Total first mortgages 9,717.2 88.9% 9,761.3 89.9% 9,640.6 89.8%
Secured loans 509.2 4.6% 562.1 5.2% 526.8 4.9%
Loans secured on residential property 10,226.4 93.5% 10,323.4 95.1% 10,167.4 94.7%
Development finance 31.2 0.3% 1.0 - 9.1 0.1%
Commercial mortgages 2.9 - 3.4 - 2.9 -
Loans secured on property 10,260.5 93.8% 10,327.8 95.1% 10,179.4 94.8%
Car loans 124.0 1.1% 73.6 0.7% 95.3 0.9%
Retail finance loans 0.1 - 0.2 - 0.2 -
Other consumer loans 244.8 2.2% 216.4 2.0% 194.9 1.8%
Asset finance loans 289.0 2.7% 224.9 2.1% 250.4 2.3%
Factoring and discounting balances 20.9 0.2% 9.8 0.1% 16.9 0.2%
Other loans 0.9 - 0.4 - 0.4 -
Total loans to customers 10,940.2 100.0% 10,853.1 100.0% 10,737.5 100.0%
Other loans include unsecured loans either advanced by Group companies or acquired from their originators at a discount.
An analysis of the indexed loan to value ratio ('LTV') for those loan accounts secured on property by value at 31 March
2017 is set out below. For acquired accounts the effect of any discount on purchase is allowed for.
31 March 2017 31 March 2016 30 September 2016
First Mortgages Secured Loans First Mortgages Secured Loans First Mortgages Secured Loans
% % % % % %
Loan to value ratio
Less than 70% 61.0 53.1 52.0 40.3 60.7 50.9
70% to 80% 23.1 17.7 28.2 18.6 23.4 17.8
80% to 90% 10.9 11.9 11.7 16.5 11.3 13.0
90% to 100% 2.7 8.3 5.4 11.9 2.2 8.9
Over 100% 2.3 9.0 2.7 12.7 2.4 9.4
100.0 100.0 100.0 100.0 100.0 100.0
Average loan to value ratio 67.1 71.9 69.3 78.2 67.1 72.7
Buy-to-let 67.2 69.5 67.2
Owner-occupied 27.5 28.9 27.5
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 0.6% during the six months ended 31 March 2017 and an annual increase of 5.3%
in the year ended 30 September 2016.
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 2017, 31 March 2016 and 30 September 2016, compared to the industry averages at those dates published by
the Council of Mortgage Lenders ('CML') and the Finance and Leasing Association ('FLA'), was:
31 March 2017 31 March 2016 30 September 2016
% % %
First mortgages
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