REG - Secure Trust BankPLC - Secure Trust Bank 2023 Annual Results
21/03/2024 07:00
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RNS Number : 6936H Secure Trust Bank PLC 21 March 2024
PRESS RELEASE
21 March 2024
For immediate release
LEI: 213800CXIBLC2TMIGI76
SECURE TRUST BANK PLC
Preliminary Results for the 12 months to 31 December 2023
Strong progress towards £4 billion loan book
David McCreadie, Chief Executive, said:
"Secure Trust has made significant progress in 2023 against our strategic
priorities. We delivered strong lending growth of 13.6% by enhancing our
customer experience and leveraging our distribution networks. We continued to
manage our growth carefully to generate an appropriate risk adjusted margin.
All four specialist lending businesses delivered record levels of new business
lending in 2023.
Our strategy to simplify the Group continues at pace, with further cost
optimisation savings delivered during the year. We are on track to deliver our
upgraded target of £5 million of annualised savings(2) by the end of 2024.
Once again, we have demonstrated our ability to grow in 2023 and the Group is
well placed to realise our ambitions. We are well on our way towards our £4
billion net loan book target and delivery of our 14-16% return on average
equity target. We remain confident about the future."
Highlights(1)
· Record new lending delivered 13.6% growth in lending balances
to £3.3 billion (2022: £2.9 billion)
· Total profit before tax of £33.4 million decreased by 24.1%
(2022: £44.0 million)
· Adjusted(3) profit before tax pre impairments up 12.4% to
£85.5 million (2022: £76.1 million)
· Adjusted(3) profit before tax of £42.6 million up 9.2% (2022:
£39.0 million)
· Adjusted(3) cost income ratio at 54.0% (2022: 55.0%); on track
to deliver £5 million in annualised savings(2) by the end of 2024. Statutory
cost income ratio at 57.5% (2022: 55.0%)
· Cost of risk stable at 1.4% (2022: 1.4%)
· Tangible book value per share increased 4.0% to £17.80 per
share
Financial Highlights(1)
The Group achieved record new business lending across all divisions during the
period, increasing 11.5% compared to 2022, while maintaining its disciplined
approach to risk management.
The net lending book has grown 13.6% in the period. In Consumer Finance, net
lending balances grew to £1.7 billion (2022: £1.4 billion) following record
new business lending of £1.7 billion (2022: £1.5 billion). In Business
Finance, net lending balances increased slightly to £1.6 billion (2022: £1.5
billion) with record new business lending of £0.6 billion (2022: £0.5
billion).
Net interest margin ('NIM') decreased to 5.4% (2022: 5.7%) reflecting new Tier
2 capital, which reduced NIM by 20 bps in the period but provides capital for
growth, and the strategic shift towards lower yielding, lower risk lending in
both our Business Finance and Consumer Finance divisions.
In line with our strategy to simplify the Group, the adjusted cost income
ratio improved from 55.0% in 2022 to 54.0%, demonstrating our ability to
leverage our cost base.
The impairment charge of £43.2 million (2022: £38.2 million) reflects a cost
of risk of 1.4% (2022: 1.4%), growth in new business, and one material loss of
£7.2 million in Commercial Finance as reported at the half year.
On an adjusted basis the Group achieved a profit before tax of £42.6 million
(2022: £39.0 million), an increase of 9.2%. Total profit before tax of £33.4
million (2022: £44.0 million) was impacted by exceptional items (£6.5
million) in 2023. In 2022, there was a £6.1 million gain on sale of the Debt
Manager (Services) Limited's ("DMS") loan portfolio.
As highlighted in our pre-close trading update, during H2 2023 we engaged in
formal discussions with the FCA about our collections processes, procedures
and policies following its Borrowers in Financial Difficulty review across the
industry. This activity has resulted in the recognition of a provision for
costs including any redress required of £4.7 million. This has been treated
as an exceptional item along with corporate activity costs of £1.8 million.
The Group achieved a total return on average equity ('ROAE') of 7.3% (2022:
10.8%) and maintained strong capital ratios. ROAE in 2022 benefitted from the
gain recognised on the sale of the DMS loan portfolio. Excluding the
gain/(losses) from discontinued operations and exceptional items in 2023, the
total continuing ROAE for 2023 would be 9.6% compared to 9.4% for 31 December
2022.
Financial summary(1)
2023 2022 Change(4
) %
Total statutory profit before tax £33.4m £44.0m (24.1)
Adjusted(3) profit before tax £42.6m £39.0m 9.2
Adjusted(3) profit before tax and pre impairments £85.5m £76.1m 12.4
Total basic earnings per share 129.6 pence 180.5 pence (28.2)
Continuing basic earnings per share 140.8 pence 158.5 pence (11.2)
Ordinary dividend per share 32.2 pence 45.1 pence (28.6)
Total return on average equity(5) 7.3% 10.8% (3.5)pp
Adjusted(3) return on average equity 9.6% 9.4% 0.2pp
Net interest margin 5.4% 5.7% (0.3)pp
Cost of risk 1.4% 1.4% -
Adjusted(3) cost income ratio 54.0% 55.0% (1.0)pp
Cost income ratio 57.5% 55.0% 2.5pp
Net lending balances £3,315.3m £2,919.5m 13.6
Customer deposits £2,871.8m £2,514.6m 14.2
Tangible book value per share £17.80 £17.11 4.0
Common Equity Tier 1 ('CET 1') ratio 12.7% 14.0% (1.3)pp
Total capital ratio(5) 15.0% 16.1% (1.1)pp
Optimising for Growth: Further strategic progress
The Group has made good progress against its strategic priorities of Simplify,
Enhance Customer Experience and Leverage Networks during the year. This
strategic progress has driven our loan book growth and cost efficiency. Key
strategic priorities for the year ahead, include:
· Project Fusion is on track to deliver £5 million of annualised
cost savings(2) by year-end 2024. Further opportunities have been identified.
· Market share gains for both Retail Finance and Vehicle Finance,
maximising the opportunities from their strong networks.
· Vehicle Finance will complete its move to a single technology
platform, opening up the potential for new pricing models and cost
efficiencies.
Other highlights
· Customer deposits grew to £2,871.8 million (2022: £2,514.6
million) through a combination of growth in fixed term funds, ISAs and access
accounts. Savings markets have repriced following the Bank of England Base
Rate increases. This combined with the increase cost of Tier 2 funding,
resulted in a cost of funds of 4.4% (2022: 1.9%).
· Tier 2 capital of £90.0 million issued to refinance the £50
million of existing 2018 Tier 2 capital, with 2023 first call dates and
support lending growth.
· Customer satisfaction remains high, as measured by Feefo, 4.6
stars (2022: 4.6 stars)
· Listed as an official UK Best Workplace™ for the fifth year
running, ranking 12 out of 87 companies (large organisations category), a
significant improvement from 2022 (ranked 29 out of 67).
· We have made strong progress against our ESG strategy that was
launched at the start of 2023, especially around Equity, Diversity and
Inclusion, Climate Action, Customer Trust and Education and Skills.
Dividend
The Directors are proposing a final dividend of 16.2 pence per share for 2023,
which will be payable on 23 May 2024 to shareholders on the register at the
close of business on 26 April 2024. The total dividend payable for 2023 is
32.2 pence per share (2022: 45.1 pence per share). This is in line with the
Group policy to return 25% of earnings to shareholders. The Board has decided
to move to a progressive dividend policy for the 2024 financial year,
reflecting feedback from shareholders.
Outlook
With inflation falling, financial markets are predicting that the Bank Base
Rate has peaked and that it will begin to fall in 2024. We sincerely hope this
begins to ease the 'cost of living' burden on our customers and is the
beginning of a period of relative economic stability notwithstanding the
impacts of the geopolitical environment. We will continue to make effective
credit decisions and provide fair interest rates for our deposit holders
ensuring the Group's growth is safe and the business generates sustainable
profits.
Our Optimising for Growth strategic priorities will continue to focus on
delivering market share gains in our four specialist lending areas through
enhancing our customer experience and leveraging our networks. 2024 will see
further simplification of the Group, which alongside lending book growth,
should further improve cost income ratios. The year has started well, with net
lending balances in line with our expectations and we have identified
opportunities for further cost efficiencies. We are well positioned to deliver
our medium-term targets and face the future with confidence.
Medium-term targets 31 December 2023 Target
Actual
Net lending balance £3.3bn £4bn
Net interest margin 5.4% >5.5%
Adjusted(3) cost income ratio 54.0% 44-46%
Adjusted(1,3) return on average equity 9.6% 14% - 16%
CET 1 ratio 12.7% >12.0%
Footnotes:
1. Performance metrics relate to continuing operations, unless otherwise
stated. Further details of the metrics can be found in the Appendix to the
2023 Annual Report and Accounts.
2. Cost savings relative to operating expenses for the 12 months ended
December 2021.
3. Adjusted metrics exclude exceptional items of £6.5 million (2022: £nil).
Details can be found in Note 8 to the financial statements.
4. pp represents the percentage point movement
5. Restated to reflect the prior year restatement of land and buildings from
fair value to historic cost. Further details are provided Note 1.3 to the
Annual Report and Accounts.
Results presentation
This announcement together with the associated investors' presentation are
available
on:www.securetrustbank.com/results-reports/results-reports-presentations
(http://www.securetrustbank.com/results-reports/results-reports-presentations)
Secure Trust Bank will host a webcast for analysts and investors today, 21
March 2024 at 10.00am, which can be accessed by registering at:
https://brrmedia.news/STB_FY23
For those wishing to ask a question, please dial into the event by conference
call:
Dial +44 (0)330 551 0200
UK Toll Free: 0808 109 0700
Confirmation code (if prompted): Secure Trust Bank
Enquiries:
Secure Trust Bank PLC
David McCreadie, Chief Executive Officer
Rachel Lawrence, Chief Financial Officer
Phil Clark, Investor Relations
Tel: +44 (0) 121 693 9100
Investec Bank plc (Joint Broker)
Bruce Garrow
David Anderson
Maria Gomez de Olea
Tel: +44 (0) 20 7597 5970
Shore Capital Stockbrokers (Joint Broker)
Mark Percy / Rachel Goldstein (Corporate Advisory)
Guy Wiehahn (Corporate Broking)
Tel: +44 (0) 20 7408 4090
Camarco
Ed Gascoigne-Pees, Geoffrey Pelham-Lane, Sean Palmer
securetrustbank@camarco.co.uk (mailto:securetrustbank@camarco.co.uk)
Tel: +44 (0) 7591 760844
This announcement contains inside information.
The person responsible for the release of this information on behalf of STB is
Lisa Daniels, Company Secretary.
Forward looking statements
This announcement contains forward looking statements about the business,
strategy and plans of STB and its current objectives, targets and expectations
relating to its future financial condition and performance. Statements that
are not historical facts, including statements about STB's or management's
beliefs and expectations, are forward looking statements. By their nature,
forward looking statements involve risk and uncertainty because they relate to
events and depend on circumstances that will occur in the future. STB's actual
future results may differ materially from the results expressed or implied in
these forward looking statements as a result of a variety of factors. These
include UK domestic and global economic and business conditions, risks
concerning borrower credit quality, market related risks including interest
rate risk, inherent risks regarding market conditions and similar
contingencies outside STB's control, the COVID-19 pandemic, expected credit
losses in certain scenarios involving forward looking data, any adverse
experience in inherent operational risks, any unexpected developments in
regulation, or regulatory and other factors. The forward looking statements
contained in this announcement are made as of the date of this announcement,
and (except as required by law or regulation) STB undertakes no obligation to
update any of its forward looking statements.
Our strategic progress
Simplify · Office space reduced by 51%
· Project Fusion on track for £5 million annualised cost savings(1) by end
2024
· Making progress to deliver 50% reduction in Scope 1 and Scope 2 CO2
emissions by 2025
· Completed closure of Debt Management Services operations
Enhance customer experience · Savings mobile app launched, 15% eligible users registered
· Over 80% self-service adoption in Retail Finance
· Enhanced collections and forbearance options in Vehicle Finance
· Customer Feefo score of 4.6 stars and 10 Year Excellence Award
Leverage networks · Supporting > 1,200 retailers
· Partnering > 750 Vehicle Finance brokers, dealers and internet
introducers
· Business Finance repeat business from established relationships
increasing
Enabled by technology · Upgraded technological capabilities
· Automated credit decisions
· Ease of partner integration
· Platforms proven to be scalable
1 Cost savings relative to operating expenses for the 12 months ended
December 2021.
Chairman's statement
I am pleased to present our Annual Report and Accounts for 2023. It has been a
difficult year for the country, and for so many of our customers, employees
and fellow citizens. Despite the challenges the Group has once again delivered
a robust set of results with an adjusted profit before tax(1) at £42.6
million (2022: £39.0 million), and a statutory profit before tax of £36.1
million (2022: £39.0 million).
For the fifth year running we have received the UK's Best Workplaces(TM)
accolade from Great Place to Work(®) and are ranked 44 amongst the top large
companies in Europe. This reflects the relentless effort by Anne McKenning and
her team in HR to promote a positive work culture. The business continues to
collect prestigious awards, with Vehicle Finance nominated for 'Finance
provider of the Year' for the third year in a row, and Commercial Finance
winning 'Asset-based lender of the year' at the Real Deal Private Equity
awards in Europe. The Group met the bracing Consumer Duty implementation
deadlines set by the FCA and we remain completely committed to ensuring the
highest standards of service and support to our customers.
We are making good progress despite some headwinds in achieving our
medium-term targets, with lending growing by £0.4 billion to £3.3 billion,
and savings book growth of £357 million to £2.9 billion. At our Capital
Markets Day we explained how reaching a £4 billion net lending book was the
cornerstone to delivering them. The Board are proposing a final dividend of
16.2 pence for the year and are now committed to a progressive policy going
forward.
It was a real pleasure to welcome Vicky Mitchell to the Board in November. She
brings extensive experience in banking most notably from Capital One (Europe)
plc. There was also sadness with the intended retirement of Nick Davis after
so many years of brilliantly building our V12 Retail Finance business. I am
also grateful to our departing Company Secretary, Mark Stevens who has been
quite simply outstanding and will be much missed.
Whilst on the issue of retirement, I announced in March 2023 that I would be
stepping down at the next Annual General Meeting. The search for my successor
was skilfully led by our Senior Independent Director, Ann Berresford, and we
have as a result in Jim Brown, an experienced banker with all the necessary
skills and experience to take the Group forward.
As I reflect on a decade on the Board of Secure Trust Bank, with over seven
years as Chairman, I am immensely proud of its achievements in the worst of
times and the best of times. The business is resilient and has shown great
agility and consistent delivery, despite the challenges of Brexit, COVID-19,
regulation and inflation. I have tremendous confidence in David and his
Executive team and in the progress made in cutting costs and focusing the
business on segments where we have proven strength and expertise.
Looking ahead, inflation is falling and the markets predict that interest
rates have peaked. Nonetheless geopolitics has created the most fragile and
unpredictable times in my lifetime. We hope for better times, but plan to
maintain our record of resilience and are well placed to achieve our growth
targets and deliver value for our shareholders. In meeting that challenge, I
am extremely grateful to the Board, past and present, and to all of our
employees whose dedication and hard work gives me every confidence for the
future.
1. Adjusted profit before tax refers to profit before income tax from
continuing operations before exceptional items.
Chief Executive's statement
The Group has made continued progress in 2023 and we are moving closer to
achieving our £4 billion net lending ambition. We delivered robust loan book
growth, improved adjusted profits(1) and maintained credit disciplines against
a challenging economic backdrop. The year began with high levels of inflation
and the Bank of England tackling this by continuing to increase the Bank Base
Rate to levels not experienced since 2008, which in turn increased financial
pressure on consumers and businesses.
The Group has actively managed its balance sheet, while maintaining effective
credit discipline. We have grown lending balances by £0.4 billion during the
period, with further market share gains in our Retail Finance and Vehicle
Finance businesses. We delivered record new business levels in each of our
specialist lending businesses. We have delivered lending growth while
carefully managing our new business pricing. We continued to manage pricing
carefully against the backdrop of rising rates and we have maintained tight
cost control. As a result, we have improved our adjusted cost income ratio(2)
by 100 basis points.
I am pleased to report a good set of results against what has been a
challenging backdrop. We achieved an adjusted profit before tax(1) of £42.6
million (2022: £39.0 million), and made progress towards our medium-term
targets, with a year-end lending portfolio of £3.3 billion, an increase of
13.6% (2022: £2.9 billion). Net interest margin reduced to 5.4%, (2022:
5.7%), reflecting the interest rate environment we are operating in, the
increasing mix of lower risk lending in our consumer businesses and increased
levels of Tier 2 debt to support our growth strategy. Our key performance
indicators are set out overleaf, which include our medium-term targets, which
we refreshed at our recent Capital Markets Day (see our
www.securetrustbank.com/cme2023 for details of the presentation).
The Group achieved a statutory profit before tax of £36.1 million (2022:
£39.0 million), which includes exceptional items of £6.5 million, which
relate to customer remediation activity following the FCA's industry review of
Borrowers in Financial Difficulty ('BiFD') and corporate activity. Further
information on these items can be found in the Financial Review.
With our four specialist lending segments, the Group operates in large
addressable markets. We believe there are opportunities to further deploy our
expertise and systems to widen and deepen our market penetration. New business
growth was 11.5% during the year (2022: 43.5%) and net lending growth was
13.6% (2022: 19.1%).
In 2023 our market share for Retail Finance new business increased to 13.5%(3)
(2022:11.4%). Likewise we have seen market share gains for our Vehicle Finance
business, where improved distribution, despite the tightening of our credit
criteria over the last 18 months, has increased our market share for new
business to 1.2%(4) (2022: 1.1%).
Further information on financial performance for the year is included in the
Financial review.
1. Adjusted profits/Adjusted profit before tax refers to profit before income
tax from continuing operations before exceptional items.
2. Excludes exceptional items. See Note 8 to the Financial Statements and
section (v) in the Appendix to the Annual Report for further details.
3. Source: Finance & Leasing Association ('FLA'): New business values
within retail store and online credit: 2023: 13.5% (2022: 12.8%): FLA total
and Retail Finance new business of £8,811 million (2022: £8,775 million) and
£1,185.4 million (2022: £1,124.3 million) respectively. As published at 31
December 2023.
4. Source: FLA. Cars bought on finance by consumers through the point of sale:
New business values: Used cars: 2023, FLA total and Vehicle Finance total of
£22,083 million (2022: £23,691 million) and £260.0 million (2022: £262.9
million) respectively, as published at 4 March December 2024.
Key performance indicators
The following key performance indicators are the primary measures used by
management to assess the performance of the Group.
Certain key performance indicators represent alternative performance measures
that are not defined or specified under International Financial Reporting
Standards ('IFRS').
Definitions of the financial key performance indicators, their calculation and
an explanation of the reasons for their use can be found in the Appendix to
the Annual Report.
All key performance indicators are presented on a continuing basis, unless
otherwise stated. Further information on discontinued operations are included
on Note 10 to the Financial Statements.
Further explanation of the financial key performance indicators is discussed
in the narrative of the Financial review, where they are identified by being
in bold font.
Further explanation of the non-financial key performance indicators is
provided in the Managing our business responsibly and Climate-related
financial disclosures sections of the Annual Report and Accounts.
The Directors' Remuneration Report in the Annual Report and Accounts sets out
how executive pay is linked to the assessment of key financial and
non-financial performance indicators.
2023 2022 2021 2020 2019
Grow
Loans and advances to customers (£bn) 3.3 2.9 2.5 2.2 2.2
Why we measure this - Shows the growth in the Group's lending balances, which
generate income
Total return on average equity (%) 7.3 10.8 15.9 5.9 12.8
Why we measure this - Measures the Group's ability to generate profit from
the equity available to it
Net interest margin 5.4 5.7 6.1 6.1 6.5
Why we measure this - Shows the interest margin earned on the Group's lending
balances, net of funding costs
Sustain
Common Equity Tier 1 ('CET 1') ratio (%) 12.7 14.0 14.5 14.0 12.6
Why we measure this - The CET 1 ratio demonstrates the Group's capital
strength
Cost to income ratio (%) 57.5 55.0 60.0 56.6 56.3
Cost to income ratio (excluding exceptional items) (%) 54.0 55.0 60.0 56.6 56.3
Why we measure this - Measures how efficiently the Group uses its cost base
to produce income
Cost of risk (%) 1.4 1.4 0.2 2.0 1.7
Why we measure this - Measures how effectively the Group manages the credit
risk of its lending portfolios
Care
Customer Feefo ratings (Stars) 4.6 4.6 4.6 4.7 4.7
Why we measure this - Indicator of customer satisfaction with the Group's
products and services
(Mark out of 5 based on star rating from 1,989 reviews (2022: 990, 2021: 937,
2020: 1,466, 2019:1,754))
Employee survey trust index score (%) 83 85 80 82 79
Why we measure this - Indicator of employee engagement and satisfaction
Environmental intensity indicator 2.2 2.8 3.0 3.1 4.7
Why we measure this - Indicator of the Group's impact on the environment
(Total Scope 1, 2 and certain Scope 3 emissions per £m Group operating
income)
Strategic priorities
At half year we launched our Optimising for Growth strategic priorities which
support our strategic pillars of Grow, Sustain and Care. A clear focus on
simplifying the Group, enhancing customer experience and leveraging our
networks will enable us to progress towards delivering all of our medium-term
targets.
Simplify
Our cost optimisation programme, Project Fusion, remained a key focus and we
have successfully delivered annualised cost savings of £4 million and are on
track for £5 million annualised cost savings by the end of 2024. This has
primarily been achieved through streamlining legacy operational processes
across a number of areas, simplifying the Group and reducing the number of
business lines we operate in. We have also taken the opportunity to review
leadership structures, roles and spans of control and undertaken an extensive
review of our supplier contracts which has delivered significant savings, as
well as reducing our property footprint by exiting two properties in Solihull
and Cardiff.
Enhance customer experiences
Ensuring we provide high customer satisfaction remains a priority for us. We
continue to score highly with Feefo, scoring 4.6 stars out of 5 (2022: 4.6 out
of 5 stars), and won Feefo's very exclusive accolade for customer service -
the Feefo 10 Years of Excellence Award, recognising businesses who have won a
Feefo Trusted Service Award for 10 years running. Feefo also recognised our
Vehicle Finance and Retail Finance teams and we were awarded 'Platinum Trusted
Service Award'. Our Savings team secured Feefo's 'Gold Trusted Service Award'.
The Group was recognised externally for its Vehicle Finance and Commercial
Finance businesses. Vehicle Finance was nominated for the Finance Provider of
the Year Award at the Motor Trader Independent Dealer Awards 2023 for the
third year in a row, and our Commercial Finance team received the Asset-Based
Lender of the Year Award at the Real Deals Private Equity Awards, the longest
running and most prestigious Private Equity awards in Europe.
Our customer experience is increasingly digital, with the launch of our
Savings app, with 15% of customers registered since the launch. Also, over 80%
of our Retail Finance customers are registered for online account management.
Internal net promoter scores remain high for our Consumer Finance businesses
and benchmark well against our industry.
As part of the new Consumer Duty, which came in at the end of July 2023, we
undertook a comprehensive review of our Consumer Finance and Savings products
and services, including consumer testing. A number of enhancements were made
to our communications to improve our customer experience.
The market for acquiring deposits continues to be competitive due to the high
interest rate environment. During the year, we raised record levels of
deposits and retained significant funds on maturing products. As Bank Base
Rate rose, we supported customers by continuing to increase rates across our
managed rate products. We have introduced a Standard Savings Rate, setting the
minimum rate of interest for variable rate accounts. Our deposits are entirely
from retail customers and 96% of deposits are fully covered by the Financial
Services Compensation Scheme.
Leverage networks
Strong relationships are critical to our business model. Maintaining a network
of introducers from which we receive repeat lending is a key focus. Our
businesses have established relationships with partners, retailers, car
dealerships, intermediaries and professional advisers. The Group looks to
further deepen these existing relationships to originate new business; to
expand and tailor our product offering; and take market share opportunities.
We have over 1,200 retailer partners within Retail Finance, which has
supported lending growth of 16.0% during the year, and a year-end lending
balance of £1.2 billion. We successfully increased our volumes in large
furniture retailers and entered a new sector for financing electric vehicle
chargers. Our AppToPay product has been seamlessly integrated into our
established technology and is operational with some of our retailer partners.
In Vehicle Finance we now have a network of over 750 car dealerships. This has
supported net lending growth of 25.2%, and a year-end lending balance of £0.5
billion.
Our Business Finance businesses offer bespoke products and personalised
account management. In Commercial Finance, private equity groups, professional
advisory firms and accountants are important relationships for new deal flow.
Nearly two-thirds of our private equity partners have made more than one
client introduction, valuing our service proposition to our clients and their
investors. In 2023, 80% of Real Estate Finance's new lending came through
existing customer relationships, demonstrating the attractiveness of our
service and product proposition.
Enabled by technology
We have successfully launched a number of technology enhancements, which have
allowed customers to interact with us more easily and to streamline the
end-to-end process. In addition to the launch of our Savings app, we launched
AppToPay in Retail Finance, a workflow management tool for Commercial Finance
and confirmation of payee within our Savings platform.
Regulatory Initiatives
During H2 2023 we engaged in formal discussions with the FCA about our
collections processes, procedures and policies. This follows the FCA's review
of Borrowers in Financial Difficulty ('BiFD') across the industry. We have
engaged external support to assist us with this review and have delivered
enhancements to our collections activities, which includes offering a wider
range of forbearance options to our customers. We expect the review to be
completed in H2 2024.
In January 2024, the FCA announced it was to undertake a review of
discretionary commission arrangements in the motor finance market. We
sometimes operated these arrangements until June 2017, ahead of the FCA
banning their use in January 2021. We believe that the overall proportion of
loans where we used discretionary commission arrangements was small and for a
shorter period, relative to the industry in general. The FCA plans to set out
its next steps in Q3 2024, when the implications for the industry should
become clearer.
Environmental, Social and Governance ('ESG')
I would like to thank all of our employees, who yet again show their
commitment and passion for the organisation. We have been acknowledged five
times this year by Great Places to Work(®) (see page 9 of the 2023 Annual
Report and Accounts), and received a Trust Index score of 83%, which was a
great outcome. Alongside this we also won the ENEI 2023 award for 'Innovative
Approach to Diversity, Equality, and Inclusion' in relation to our podcast,
which is aimed at creating a voice for colleagues, helping dispel stereotypes,
increasing understanding and celebrating our diversity.
We recently installed solar panels at our head office, which will contribute
to our objective of reducing our Scope 1 and 2 CO(2)e emissions. This will
provide about a quarter of our electricity and reduce greenhouse gas emissions
by 15 tonnes CO(2)e per year. We have seen our environmental intensity
indicator reduce 21.4% year-on-year. We have also made strong progress against
our other ESG targets. Further details of our achievements can be found on
pages 41 to 43 of the 2023 Annual Report and Accounts.
Retirement of Chairman
On behalf of all my colleagues, I would like to thank Michael for his
exemplary service to the Group over the years. He has been an exceptional
Chairman, and I thank him personally for the guidance and support he has given
me since I took on the role of Chief Executive Officer. His counsel has been
invaluable. I wish him the very best for the future.
Outlook
With inflation falling ahead of Bank of England expectations, financial
markets are predicting the Bank Base Rate has peaked and will begin to fall in
2024. While macro conditions remain uncertain, the Board is very confident in
the Group's ability to make further strategic progress in the year ahead,
improve market share in our Consumer businesses and manage credit risk
effectively. We sincerely hope this starts to ease the 'cost of living' burden
and financial pressure on our customers and is the beginning of a period of
relative economic stability. We are well positioned to deliver our medium-term
targets and face the future with renewed confidence.
Financial review
Income statement
Continuing operations 2023 2022 Movement
£million
£million %
Interest income and similar income 304.0 203.0 49.8
Interest expense and similar charges (136.5) (50.4) 170.8
Net interest income 167.5 152.6 9.8
Fee and commission income 17.3 17.4 (0.6)
Fee and commission expense (0.1) (0.4) (75.0)
Net fee and commission income 17.2 17.0 1.2
Operating income 184.7 169.6 8.9
Net impairment charge on loans and advances to customers (43.2) (38.2) 13.1
Gains on modification of financial assets 0.3 1.1 (72.7)
Fair value and other gains/(losses) on financial instruments 0.5 (0.3) (266.7)
Operating expenses (99.7) (93.2) 7.0
Profit before income tax from continuing operations before exceptional items 42.6 39.0 9.2
Exceptional items (6.5) - -
Profit before income tax from continuing operations 36.1 39.0 (7.4)
Income tax expense (9.7) (9.4) 3.2
Profit for the year from continuing operations 26.4 29.6 (10.8)
Discontinued operations
(Loss)/profit before income tax from discontinued operations (2.7) 5.0 (154.0)
Income tax credit/(expense) 0.6 (0.9) (166.7)
(Loss)/profit for the year from discontinued operations (2.1) 4.1 (151.2)
Profit for the year 24.3 33.7 (27.9)
Basic earnings per share (pence) - Total 129.6 180.5 (28.2)
Basic earnings per share (pence) - Continuing 140.8 158.5 (11.2)
Selected key performance indicators and performance metrics 2023 2022 Movement
£million
£million %
Total profit before tax 33.4 44.0 (24.1)
% % Percentage
point movement
Net interest margin 5.4 5.7 (0.3)
Yield 9.8 7.5 2.3
Cost of funds 4.4 1.9 2.5
Adjusted cost to income ratio 54.0 55.0 (1.0)
Statutory cost to income ratio 57.5 55.0 2.5
Cost of risk 1.4 1.4 -
Adjusted return on average equity 9.6 9.4 0.2
Total return on average equity 7.3 10.8 (3.5)
Common Equity Tier 1 ('CET 1') ratio 12.7 14.0 (1.3)
Total capital ratio 15.0 16.1 (1.1)
Certain key performance indicators and performance metrics represent
alternative performance measures that are not defined or specified under
International Financial Reporting Standards ('IFRS'). Definitions of these
alternative performance measures, their calculation and an explanation of the
reasons for their use can be found in the Appendix to the Annual Report. In
the narrative of this review, key performance indicators are identified by
being in bold font.
All key performance indicators are presented on a continuing basis, unless
otherwise stated. Adjusted profit before tax refers to profit before income
tax from continuing operations before exceptional items. Further information
on exceptional items are included below and discontinued operations are
included on Note 10 to the Financial Statements.
The Directors' Remuneration Report in the Annual Report and Accounts sets out
how executive pay is linked to the assessment of key financial and
non-financial performance metrics.
2023 saw a continued focus on net lending growth whilst maintaining strong
credit discipline and cost management. Growth has been focused on higher
credit quality prime lending, particularly within our Consumer Finance
businesses. Net lending growth of 13.6% has generated an 8.9% increase in
operating income, and this has been achieved with a 7.0% increase in costs.
The Group achieved an adjusted profit before tax of £42.6 million (2022:
£39.0 million), with the CET 1 ratio remaining strong at 12.7%.
Total Earnings Per Share ('EPS') fell from 180.5 pence per share (2022) to
129.6 pence per share. However, on an adjusted basis EPS increased to 172.3
pence per share (2022: 158.5 pence per share). Total return on average equity
decreased from 10.8% (2022) to 7.3%. On an adjusted basis return on average
equity increased to 9.6% (2022: 9.4%). Total return on average equity
performance in 2022 was impacted by the one-off £6.1 million gain recognised
on the sale of the Debt Managers (Services) Limited's loan portfolio.
Detailed disclosures of EPS are shown in Note 11 to the Financial Statements.
The components of the Group's profit are analysed in more detail in the
sections below.
Operating income
The Group's operating income increased by 8.9% to £184.7 million (2022:
£169.6 million). Net interest income on the Group's lending assets continues
to be the largest component of operating income. This increased by 9.8% to
£167.5 million (2022: £152.6 million), driven by growth in net lending
assets, with average balances increasing by 14.8% to £3,099.4 million (2022:
£2,699.3 million).
The Group's net interest margin decreased to 5.4% (2022: 5.7%), reflecting new
Tier 2 capital required to support our growth ambitions, which reduced NIM by
19 bps in the year and the strategic shift towards lower yielding, lower risk
lending in both our Business Finance and Consumer Finance divisions. The last
two years have been challenging given the steep rise in interest rates,
and we have actively managed the repricing of new lending and retail deposits
to maintain product margins.
The Group's other income, which relates to net fee and commission income,
increased slightly by 1.2% to £17.2 million (2022: £17.0 million).
Impairment charge
Impairment charges increased to £43.2 million (2022: £38.2 million). The
charge was impacted by one material loss of £7.2 million, relating to a
long-running problem debt case within the Commercial Finance business, which
was highlighted in the 2022 Annual Report and Accounts (Note 47.2
Non-adjusting post balance sheet events). Circumstances around the particular
case were unique, with a lessons learned exercise confirming no similar
concerns across the portfolio. Whilst it is disappointing to record a loss of
this magnitude, the cost of risk since inception of the Commercial Finance
business in 2014, excluding this specific impairment charge, has been 0.04% of
average lending balances, and would be 0.6%, inclusive of this case. This loss
in the year resulted in a Group cost of risk of 1.4% in line with the prior
year (2022: 1.4%). Cost of risk also reflects the benefit of an improving cost
of risk within the Consumer Finance businesses, due to an increased mix of
higher quality lending, offset by increased impairment charges on
two defaulted loans in the Real Estate Finance business.
Cost of risk for the year, excluding the material loss highlighted above, is
1.2%. Overall impairment provisions remain robust at £88.1 million (2022:
£78.0 million) with a total coverage level of 2.6% (2022: 2.6%).
During the financial year, the Group refreshed macroeconomic inputs to its
IFRS 9 Expected Credit Loss ('ECL') models, incorporating its external
economic advisor's latest UK economic outlook. The forecast economic
assumptions within each IFRS 9 scenario, and the weighting applied, are set
out in more detail in Note 16 to the Financial Statements.
The Group has applied Expert Credit Judgements ('ECJ's') underlays totalling
£1.2 million (2022: £2.9 million overlay), where management believes the
IFRS 9 modelled output is not fully reflecting current risks in the loan
portfolios. Further details of these ECJs are included in Note 16 to the
Financial Statements. During the year, the Group implemented a new IFRS 9
Probability of Default model for Vehicle Finance near prime lending, which now
better reflects the underlying credit quality of business written, and has
reduced the need for ECJ's.
Fair value and other gains/(losses) on financial instruments
During the year, the Group realised a gain of £1.2 million (2022: £nil) in
relation to the buy-back of the 2018 Tier 2 debt. The Group also recognised a
loss of £0.8 million (2022: £nil) relating to interest rate swaps being
entered into ahead of hedge accounting becoming available, which will reverse
to the income statement over the remaining life of the swaps. The Group has
highly effective hedge accounting relationships, and as a result, recognised a
small hedging ineffectiveness gain of £0.1 million (2022: £0.3 million
loss).
Operating expenses
The Group's cost base increased in the period by 7.0% to £99.7 million (2022:
£93.2 million), with the adjusted cost income ratio improving to 54.0% (2022:
55.0%), despite the impact of inflation on operating expenses. The ratio
reflects both the increase in operating income and the ongoing programme of
initiatives that seek to achieve more efficient and effective operational
processes, including digitalisation of processes, supplier and procurement
reviews, organisational design and property management. We are on track to
deliver £5 million of annualised costs savings by the end of 2024 as part of
Project Fusion. Statutory cost income ratio inclusive of exceptional items was
57.5% (2022: 55.0%).
Taxation
The effective tax rate on continuing activities of 26.9%, increased compared
with 2022 (24.1%) following the change in Corporation Tax rate to 25% from 19%
with effect from 1 April 2023. The effective rate is above the 2023
Corporation Tax rate of 23.5% mainly as a result of non-deductible expenses
in exceptional items. The total effective tax rate is 27.2% (2022: 23.4%).
Exceptional items
The Group recognised charges for exceptional items of £6.5 million during the
year (2022: £nil). Costs of £1.8 million were incurred in relation to
non-recurring corporate activity that took place during H1 2023. Following the
FCA's review of Borrowers in Financial Difficulty ('BiFD') across the
industry, and in response to the specific feedback we received on our own
collection activities, costs of £4.7 million (comprising £2.7 million costs
and £2.0 million potential redress/goodwill) have been incurred, or provided
for, relating to processes, procedures and policies in our Vehicle Finance
collections operations. We have engaged external support to assist us with
this work and, where necessary, are taking the necessary actions to enhance
our approach. Further details are included in Note 8 to the Financial
Statements.
Discontinued business
In May 2022, the Group disposed of the loan portfolio of Debt Managers
(Services) Limited, realising an overall initial profit on disposal of £6.1
million in the first half of 2022. A further £2.7 million of wind-down costs
have been incurred during the year, with no significant further costs
expected.
Distributions to shareholders
The Board recommended the payment of a final dividend for 2023 of 16.2 pence
per share, which together with the interim dividend of 16.0 pence per share,
represents a total dividend for the year of 32.2 pence per share (2022: 45.1
pence per share). This is in line with the Group's policy to pay total annual
dividends representing 25% of annual earnings.
Summarised balance sheet
Assets 2023 2022
£million £million
Cash and Bank of England reserve account 351.6 370.1
Loans and advances to banks 53.7 50.5
Loans and advances to customers 3,315.3 2,919.5
Fair value adjustment for portfolio hedged risk (3.9) (32.0)
Derivative financial instruments 25.5 34.9
Other assets 35.8 36.8
3,778.0 3,379.8
Liabilities
Due to banks 402.0 400.5
Deposits from customers 2,871.8 2,514.6
Fair value adjustment for portfolio hedged risk (1.4) (23.0)
Derivative financial instruments 22.0 26.7
Tier 2 subordinated liabilities 93.1 51.1
Other liabilities 46.0 83.5
3,433.5 3,053.4
New business
Loan originations in the year, being the total of new loans and advances to
customers entered into during the period, increased by 11.5% to £2,305.4
million (2022: £2,067.8 million). Further details on the divisional split of
this new business can be found in the Business review.
Customer lending and deposits
Group lending assets increased by 13.6% to £3,315.3 million (2022: £2,919.5
million), surpassing £3.0 billion for the first time, primarily driven by
strong growth in our Consumer Finance and Real Estate Finance businesses. This
represents a significant step towards our £4.0 billion of net lending
ambition, as presented at our recent Capital Markets Day.
Consumer Finance balances grew by £262.8 million or 18.4%, driven by strong
demand from strategic partner retailers.
Vehicle Finance arrears and levels of provision have been temporarily impacted
by the Group's review of its collections policies and procedures, as part of
our programme of work designed to ensure we deliver good outcomes for
customers. Further analysis of loans and advances to customers, including a
breakdown of the arrears profile of the Group's loan books, is provided in
Note 16 to the Financial Statements.
Customer deposits include Fixed term bonds, ISAs, Notice and Access accounts.
Customer deposits increased by 14.2% to £2,871.8 million (2022: £2,514.6
million). Total funding ratio of 111.7% decreased slightly from 31 December
2022 (112.5%). The mix of the deposit book has continued to change as the
Group has adapted to the Base Rate changes throughout the period, with a focus
on meeting customer demand for Access products, and retaining stable funds,
which is reflected in the increase in Fixed term bonds and ISAs.
New business volumes £million
Retail Finance 1,185.4
Vehicle Finance 471.2
Real Estate Finance 434.0
Commercial Finance 214.8
Total 2,305.4
2022 Total 2,067.8
Loans and advances to customers £million
Retail Finance 1,223.2
Vehicle Finance 467.2
Real Estate Finance 1,243.8
Commercial Finance 381.1
Total 3,315.3
2022 Total 2,919.5
Investments and wholesale funding
As at the end of 2023, the Group held no debt securities (2022: £nil).
Amounts due to banks consisted primarily of drawings from the Bank of England
Term Funding Scheme with additional incentives for SMEs ('TFSME') facility.
Tier 2 subordinated liabilities
Tier 2 subordinated liabilities represents £90.0 million of 10.5-year 13.0%
Fixed Rate Callable Subordinated Notes, which qualify as Tier 2 capital. The
existing 2018 Notes were repurchased in February and March 2023.
Capital
Management of capital
Our capital management policy is focused on optimising shareholder value over
the long-term. Capital is allocated to achieve targeted risk adjusted returns
whilst ensuring appropriate surpluses are held above the minimum regulatory
requirements.
Key factors influencing the management of capital include:
· The level of buffers and the capital requirement set by the
Prudential Regulation Authority ('PRA');
· Estimated credit losses calculated using IFRS 9 methodology, and
the applicable transitional rules;
· New business volumes; and
· The product mix of new business.
Capital resources
Capital resources increased over the period from £376.8 million to £397.6
million. This includes the proposed 2023 final dividend of £3.1 million. The
increase was primarily in CET 1 capital and was driven by total profit for the
year of £24.3 million, offset by the 2023 dividend of £3.1 million, and the
reduction in the IFRS 9 transitional adjustment of £9.6 million. In addition,
the increase in Tier 2 was driven by the newly-issued £90.0 million
subordinated debt, which will have increased utilisation over time as capital
eligibility increases as a consequence of risk weighted asset growth.
Capital 2023 Restated(1)
£million 2022
£million
CET 1 capital, excluding IFRS 9 transitional adjustment 335.8 315.2
IFRS 9 transitional adjustment 2.1 11.7
CET 1 capital 337.9 326.9
Tier 2 capital(2) 59.7 49.9
Total capital 397.6 376.8
Total risk exposure 2,653.4 2,334.6
Capital ratios 2023 2022
% %
CET 1 capital ratio 12.7 14.0
Total capital ratio 15.0 16.1
CET 1 capital ratio (excluding IFRS 9 transitional adjustment) 12.7 13.6
Total capital ratio (excluding IFRS 9 transitional adjustment) 14.9 15.7
Leverage ratio 9.7 10.7
1. Restated to reflect a change in accounting policy relating to land and
buildings, which are now presented at historical cost. Further details are
provided in Note 1.3 to the Financial Statements.
2. Tier 2 capital, which is solely subordinated debt net of unamortised issue
costs, capped at 25% of total Pillar 1 and Pillar 2A requirements.
Capital requirements
The Total Capital Requirement, set by the PRA, includes both the calculated
requirement derived using the standardised approach and the additional capital
required, derived from the Internal Capital Adequacy Assessment Process
('ICAAP'). In addition, capital is held to cover generic buffers set at a
macroeconomic level by the PRA.
Restated(1)
2023 2022
£million £million
Total Capital Requirement 238.8 210.1
Capital conservation buffer 66.3 58.4
Countercyclical buffer 53.1 23.3
Total 358.2 291.8
1. Restated to reflect a change in accounting policy relating to land and
buildings, which are now presented at historical cost. Further details are
provided in Note 1.3 to the Financial Statements.
The increase in lending balances through the year resulted in an increase in
risk weighted assets over the period, bringing the total risk exposure up from
£2,334.6 million to £2,653.4 million. The capital conservation buffer has
been held at 2.5% of total risk exposure since 1 January 2019. The
countercyclical capital buffer rose from 0% to 1% of relevant risk exposures
in December 2022, and remained at this level until 5 July 2023 when it rose
again to 2%.
Liquidity
Management of liquidity
The Group uses a number of measures to manage liquidity risk. These include:
· The Overall Liquidity Adequacy Requirement ('OLAR'), which is the
Board's view of the Group's liquidity needs, as set out in the Board-approved
Internal Liquidity Adequacy Assessment Process ('ILAAP').
· The Liquidity Coverage Ratio ('LCR'), which is a regulatory
measure that assesses net 30-day cash outflows as a proportion of High Quality
Liquid Assets ('HQLA').
· Total funding ratio, as defined in the Appendix to the Annual
Report.
· 'HQLA' are held in the Bank of England Reserve Account and UK
Treasury Bills. For LCR purposes, the HQLA excludes UK Treasury Bills that are
pledged as collateral against the Group's TFSME drawings with the Bank of
England.
The Group exceeded the LCR minimum threshold (100%) throughout the year, with
the Group's average LCR being 208.0% (based on a rolling 12 month-end
average).
Liquid assets
We continued to hold significant surplus liquidity over the minimum
requirements throughout 2023, managing liquidity by holding HQLA and utilising
funding predominantly from retail funding balances from customer deposits.
Total liquid assets reduced to £400.2 million (2022: £416.9 million) which
amongst other things reflects the levels of liquidity at the end of 2023 to
support funding required to fund the pipeline.
The Group is a participant in the Bank of England's Sterling Money Market
Operations under the Sterling Monetary Framework and has drawn £390.0 million
under the TFSME. The Group has no liquid asset exposures outside of the United
Kingdom and no amounts that are either past due or impaired.
Liquid assets 2023 2022
£million £million
Aaa - Aa3 356.4 370.1
A1 - A2 43.8 41.6
Unrated - 5.2
Total 400.2 416.9
We continue to attract customer deposits to support balance sheet growth. The
composition of customer deposits is shown in the table below:
Customer deposits 2023 2022
% %
Fixed term bonds 54 56
Notice accounts 6 20
ISA 22 17
Access accounts 18 7
Total 100 100
Business review
Consumer Finance
Retail Finance
We provide quick and easy finance options at point of purchase:
· Helping consumers purchase lifestyle goods and services without
having to wait.
· Supporting the growth of UK retailers by offering integrated
finance options that drive sales.
Performance history
2023 2022 2021 2020 2019
New business (£m) 1,185.4 1,124.3 771.5 614.5 726.0
Loans and advances to customers (£m) 1,223.2 1,054.5 764.8 658.4 688.9
Net interest margin (%) 6.4 6.8 8.1 8.7 8.9
Risk adjusted margin (%) 5.3 5.6 7.8 6.7 6.4
What we do
· We operate a market-leading online e-commerce service to
retailers, providing unsecured, prime lending products to UK customers to
facilitate the purchase of a wide range of consumer products, including
bicycles, musical equipment and instruments, furniture, outdoor/leisure items,
electronics, dental, jewellery, home improvements products and football season
tickets. These retailers include a large number of household names.
· The finance products are either interest-bearing or have
promotional interest-free credit subsidised by retailers. For interest-free
products, the customer pays the same price for the goods, regardless of
whether credit is taken or not. Taking the credit option allows the customer
to spread the cost of the main purchase into more manageable monthly payments,
and afford ancillary extras and add-ons, which can also be financed.
Interest-free borrowing attracts a large proportion of high credit quality
customers.
· The online processing system allows customers to sign their
credit agreements digitally, thereby speeding up the pay-out process, and
removing the need to handle sensitive personal documents. 90% of applications
are decisioned in an average of six seconds.
· The business is supported by a highly experienced senior team
and workforce.
2023 performance
· Lending and revenue growth has come mainly from interest-free
lending into the furniture and jewellery sectors. We achieved record new
lending for another year and increased our lending balances by 16% (2022:
37.9%), resulting from an increase in our market share of the retail store and
online credit new business market(1).
· Extension of our footprint within key retail partners, as well
as the introduction of new retailer relationships leveraging our strong track
record of systems integration. As a result of significant new business growth
over recent years we are now well established as one of the major lenders in
the point of sale credit market.
· We have consciously focused on prime sectors, remaining
cautious in response to the economic environment. This is a driver of the net
interest margin decrease year-on-year. However, cost of risk (1.4%) has also
decreased compared to 2022 (1.6%), and is in line with expectation and
reflects a growing lower credit risk lending book.
· At the end of the year, 86.3% (2022: 85.1%) of the lending book
related to interest-free lending, and 80.4% (2022: 68.9%) of customers have
signed up to online account management allowing self-service of their account.
Outlook
· We anticipate further lending growth from our existing retail
partners and our operational plans are focused on digitalising all key
processes to improve our customer and retail partners' experience.
1. Source: Finance & Leasing Association ('FLA'): New business values
within retail store and online credit: 2023: 13.5% (2022: 12.8%): FLA total
and Retail Finance new business of £8,811 million (2022: £8,775 million) and
£1,185.4 million (2022: £1,124.3 million) respectively. As published at 31
December 2023.
Vehicle Finance
We help to drive more business in UK car dealerships:
· Providing funds to customers to help them buy used vehicles
from dealers via Vehicle Finance.
· Providing funds to dealers to help them buy vehicles for their
forecourts and showrooms via Stock Funding.
Performance history
2023 2022 2021 2020 2019
New business (£m) 471.2 401.7 199.8 78.6 183.3
Loans and advances to customers (£m) 467.2 373.1 263.3 243.9 323.7
Net interest margin (%) 10.3 12.0 13.1 12.8 13.5
Risk adjusted margin (%) 7.3 6.1 14.0 5.1 9.1
What we do
· We provide lending products that are secured against the
vehicle being financed. The majority of vehicles financed are used cars sold
by independent dealers.
· We also provide vehicle stock funding whereby funds are
advanced and secured against dealer forecourt used car stock; sourced from
auctions, part exchanges or trade sources.
· Finance is provided via technology platforms, allowing us to
receive applications online from its introducers; provide an automated
decision; facilitate document production through to pay-out to dealer; and
manage in-life loan accounts.
2023 performance
· Continued lending growth, despite the market for used cars
bought on point-of-sale finance shrinking by 6.8%(1) year-on-year by value.
Market share increased to 1.2% from 1.1% in 2023(1).
· New business growth exceeded lending growth due to the
short-term duration of Stock Funding.
· Our Prime lending products, launched in 2021, delivered £114.8
million of new lending during 2023 and represent 24.4% (2022: 23.4%) of new
business.
· 33.4% (2022: (24.2%) of the lending portfolio relates to prime
products, this is reflected in our net interest margin and risk-adjusted
margin performance. Cost of risk reduced from 6.3% to 3.4% (2022), driven by
the mix of higher credit quality business following actions in 2022 and 2023
to tighten credit criteria.
· The Stock Funding product launched in 2019 now has 250 active
dealers (2022: 193) with credit lines of £51.5 million (2022: £37.0
million).
· As part of the continuing Motor Transformation Programme
('MTP'), in 2023 we successfully delivered phase two of the new collection
platform to incorporate the prime portfolio.
· During H2 2023, we engaged in formal discussions with the FCA
about our collections policies and procedures in Vehicle Finance, in relation
to Borrowers in Financial Difficulty. Where necessary, we are enhancing our
approach to ensure good outcomes are delivered in line with the Group's
purpose and values (see Note 8 to the Financial Statements).
Outlook
· The final phase of MTP is to transfer Near Prime originations
onto the new platform with the implementation of a new rate for risk module,
which will allow us to price lending based on the risk profile of the
borrower.
· In January 2024, the FCA announced it was to undertake a review
of discretionary commission arrangements in the motor finance market. We
sometimes operated these arrangements until June 2017. The FCA plans to set
out its next steps in Q3 2024, when the implications for the industry should
become clearer. (See Note 31.1.2 to the Financial Statements).
1. Source: FLA. Cars bought on finance by consumers through the point of sale:
New business values: Used cars: 2023, FLA total and Vehicle Finance total of
£22,083 million (2022: £23,691 million) and £260.0 million (2022: £262.9
million) respectively, as published at 4 March 2024.
Business Finance
Real Estate Finance
We lend money against residential properties to professional landlords
and property developers:
· Providing commercial lending facilities to professional
landlords to allow them to improve and grow their portfolio.
· Providing development facilities to property developers and SME
housebuilders to help build new homes for sale or letting.
· We have an experienced specialist team, with many years of
property expertise, which is nimble and responsive within the market.
Performance history
2023 2022 2021 2020 2019
New business (£m) 434.0 384.5 376.1 189.5 316.3
Loans and advances to customers (£m) 1,243.8 1,115.5 1,109.6 1,051.9 962.2
Net interest margin (%) 2.6 2.7 3.0 3.0 3.2
Risk adjusted margin (%) 2.2 2.6 3.0 2.5 3.2
What we do
· Providing first charge secured lending to professional
landlords to allow them to improve and grow their portfolio.
· Providing development facilities to property developers and SME
housebuilders to help build new homes for sale or letting.
· We provide lending secured against property assets to a maximum
70% loan-to-value ratio, on fixed or variable rates over a term of up to five
years.
· Finance opportunities are sourced and supported on a
relationship basis directly and via introducers and brokers.
· We maintain a strong risk management framework for existing and
prospective customers.
2023 performance
· We delivered record new business lending for the third year
running by working with existing larger customers to take advantage of new
investment opportunities and to re-finance their portfolios.
· Lending balances are at an all-time high, despite a difficult
economy, with interest rate volatility and SME borrowers less willing or able
to risk their capital.
· The portfolio principally comprises lower risk residential
investment lending, 83.8% (2022: 85.0%). The remainder of the book relates to
development and commercial investment lending.
· Net revenue margin was broadly flat year-on year despite the
challenging interest rate environment.
· Impairment charges for the year were £4.5 million (2022: £1.3
million) and this has impacted risk adjusted margin year-on-year. This charge
primarily reflects a higher provision on one legacy development loan from
within the whole portfolio. Without this charge, risk adjusted margin would be
2.5% (2022: 2.6%).
· Secured loan book with an average loan-to-value of 57.2% (2022:
57.7%), reducing the level of inherent risk to credit losses.
Outlook
· We believe that the long-term outlook is positive for real
estate lending. Our specialist and bespoke services stand us in good stead to
deliver sustainable growth.
Commercial Finance
We support the growth of UK businesses by enabling effective cash flow:
· Providing a full suite of Asset Based Lending to UK clients who
need working capital solutions.
· Providing bespoke lending facilities where Secure Trust Bank is
well known for working closely with clients to sustain their businesses.
Performance history
2023 2022 2021 2020 2019
New business (£m) 214.8 157.3 93.7 126.1 162.2
Loans and advances to customers (£m) 381.1 376.4 313.3 230.7 251.7
Net interest margin (%) 7.0 6.4 5.7 5.5 6.0
Risk adjusted margin (%) 4.7 6.2 5.8 5.0 5.9
What we do
· Our lending remains predominantly against receivables,
releasing funds up to 90% of qualifying invoices under invoice discounting
facilities. Other assets can also be funded either long or short-term and
across a range of loan-to-value ratios alongside these facilities.
· We also provided additional lending to existing customers
through the Government guaranteed Coronavirus Business Interruption Loan
('CBIL') Scheme, Coronavirus Large Business Interruption Loan ('CLBIL') Scheme
and Recovery Loan Scheme ('RLS').
· Business is sourced and supported directly from clients via
private equity houses and professional introducers, but is not reliant on the
broker market.
· The Commercial Finance team has a strong reputation across the
Asset Based Lending market. The experienced specialist team works effectively
with its partners across private equity and tier 1 and 2 accountancy
practices.
· Partners and clients have direct access to decision-makers.
2023 performance
· We delivered record new business in 2023.
· There was a modest year-on-year increase in lending balances as
the economic headwinds led to higher client attrition.
· The large increase in net revenue margin is driven by fees
charged for new facilities, extensions and early terminations. In 2023 and
2022 increases in UK Base Rates were passed through to clients.
· As reported in the 2023 Interim Report, the 2023 impairment
charge of £8.0 million incorporates a £7.2 million charge on a one-off,
long-running problem debt case. Circumstances around the particular case were
unique, with a lessons learned exercise confirming no similar concerns across
the portfolio.
· The Group continues to administer UK Government CBIL, CLBILS
and RLS products. At 31 December 2023, the outstanding lending balances under
these schemes totalled £15.5 million (2022: £28.9 million) with 76% of
balances now repaid.
Outlook
· Economic and market conditions remain challenging for our
clients, but we remain committed to supporting their growth and success and we
look forward to partnering with new businesses in 2024.
Savings
We look after our customers' savings and provide a competitive return:
· Helping our customers save for special events such
as a holiday, wedding or retirement.
· Helping our lending businesses fund their product to enable
them to lend in the market we compete in.
Savings Review
2023 2022 2021 2020 2019
Total deposits (£m) 2,871.8 2,514.6 2,103.2 2,020.3 1,992.5
Total funds raised (£m) 1,719.1 1,210.1 661.3 535.9 560.2
2023 2022
ISA 629.6 421.8
Notice 174.3 500.7
Access 521.3 178.1
Term 1,546.6 1,414.0
Total 2,871.8 2,514.6
What we do
· We offer a range of savings accounts that are purposely simple
in design, with a choice of products from Access to 180-day notice, and six
month to seven year fixed terms across both Bonds and ISAs.
· Accounts are made available and priced in line with our ongoing
funding needs, allowing each individual to hold a maximum balance of £1
million.
· Our range of savings products enables us to access the majority
of the UK personal savings markets and compete for significant liquidity
pools, achieving a lower marginal cost with the volume, mix and the
competitive rates offered; optimised to the demand of our funding needs.
2023 performance
· We successfully raised over £1.7 billion of new deposits and
retained over £0.7 billion at maturity during the year, reaching a record
deposit holding of £2.9 billion.
· During 2023 the Bank of England continued to increase the Bank
Base Rate, which drove up the cost of acquiring and retaining retail deposits.
We continue to offer a simple product offering, distributed via the 'best buy'
tables and therefore priced competitively.
· We have built on the launch of the Access Account in 2022, with
balances surpassing £0.5 billion at year-end. Savers have benefited from
higher interest rates and a competitive variable market allowing decent
returns without sacrificing immediate access to funds. Similarly, these
features of the market have weakened demand for Notice products. We enhanced
the Access Account this year, allowing customers to save deposits from £1 to
£250,000, expanding from our previous bands of £1,000 to £85,000.
· ISAs have remained important to achieving our growth plans in
2023, as well as for customers, with the higher-rate market environment
creating increased demand for tax-free savings. We have improved the ISA
application journey by introducing a shorter form process for existing
customers.
· Fixed-rate term deposits continue to form a key part of our
funding mix, with over £0.6 billion retained into new fixed-term products at
maturity.
· During 2023, we continued to prioritise Savings' highest volume
correspondence and convert from paper to digital. 42% of correspondence was
converted to digital during 2023. The overall total correspondence that is now
digital is 59%. For customers, this is timelier, removes reliance on the
postal service, and supports our strategic priorities of simplifying and
enhancing our customer experience. This initiative provides a cost saving, as
well as acting on customer feedback about too much paper being issued. This
initiative continues into 2024.
Outlook
· 2024 is likely to be a dynamic market for savings as product
pricing adjusts to a falling interest rate environment. Customers will seek to
optimise returns and we have a product set to meet these demands.
Market review
The Group operates exclusively within the UK and its revenue is derived almost
entirely from customers operating in the UK, the Group is therefore
particularly exposed to the condition of the UK economy. Customers' borrowing
demands are variously influenced by, among other things, UK property markets,
employment levels, inflation, interest rates and customer confidence. The
economic environment and outlook affects demand for the Group's products,
margins that can be earned on lending assets and the levels of loan impairment
provisions.
As a financial services firm, the Group is subject to extensive and
comprehensive regulation by governmental and regulatory bodies in the UK. The
Group conducts its business subject to ongoing regulation by the Financial
Conduct Authority ('FCA') and the Prudential Regulation Authority ('PRA'). The
Group must comply with the regulatory regime across many aspects of its
activities, including: the training, authorisation and supervision of
personnel; systems; processes; product design; customer journey and
documentation.
Economic review
Economic growth, measured in quarterly UK Gross Domestic Product ('GDP'),
slowed in 2023, with only a 0.1% increase(1) in GDP recorded. This represents
a material fall from 2022 where annual GDP growth was 4.3%. Economists' base
case forecasts indicate GDP growth will remain low in 2024 at 0.5%, driven by
the lagged impacts of tighter monetary policy on both households and the
corporate sector.
Inflation remains above the Bank of England 2% target, although it has been
falling ahead of expectations during the year, from 10.1% in January 2023 to
4.2%(1) in December 2023. The fall follows the Bank of England's response to
tackle inflation with several Base Rate hikes in the year, taking rates from
3.5% to 5.25% by December 2023. Financial markets have responded to the recent
inflation data, pricing in a fall in the Bank Base Rate to 4.25% by the end of
2024. Although the Bank Base Rate has likely peaked, the full impact of the
tightening since late 2021 is still to feed through to the real economy and
consumers' disposable incomes and capacity for discretionary spending.
Employment levels remain high at 75.0%(1), while unemployment continues to
remain at a low level of 3.8%(1), but did increase slightly during the year
from 3.7%(1). Vacancies in the labour market fell to circa 0.9 million(1) as
employers hold back on recruitment to control costs in an uncertain economic
environment. Given the continued pressures on employers from borrowing and
energy costs, unemployment is expected to rise towards a peak of 4.5% by
mid-2024. Strong annual wage growth at 6.2%(1) to December 2023 continues to
fuel inflation, but has fallen from the in-year peak of 7.9%(1).
As anticipated, the impact of tighter credit and higher interest rates has
softened transaction volumes and prices in the housing market. Lenders have
reported lower mortgage approvals and negative net lending to October 2023.
Given lower rate expectations linked to lower inflation figures, lenders
started to cut mortgage rates in the latter part of 2023 and this has
continued into early 2024, leading to an uptick in mortgage approvals.
However, given the wider economic pressures, economists continue to predict a
further correction in house prices of circa 6% in 2024.
Outlook
Interest rates are expected to fall in 2024, with the market expecting the
first cut to take place in Q2 2024 and rates ultimately ending the year at
4.25%. The UK economy is expected to grow only modestly through 2024. House
prices are expected to continue to fall after a long period of growth, and
unemployment is expected to rise to a peak of 4.5% from its current level. The
impact of high interest rates will impact consumers as they remortgage away
from historic low-rate deals. The full impact, however is yet to flow through
with 1.5 million mortgage borrowers having fixed rate deals expiring before
the end of 2024. With forecast low GDP and higher interests still to flow
through in full to household incomes, the balance of risks therefore to the UK
remains skewed to the downside.
1. Source: Office for National Statistics, data as at 31 December 2023, unless
otherwise stated.
Government and regulatory
This has been another eventful year for Government and regulatory
announcements that impact the Group and/or the markets in which it operates.
The key announcements in 2023 are set out below.
Prudential regulation
In November 2022, the PRA issued CP16/22 'The PRA consults on proposals for
implementation of the Basel 3.1 standards' setting out its proposed changes to
regulatory requirements, which are now expected to become effective from 1
July 2025. The proposals set out changes to the regulatory environment,
including significant changes to the capital requirements for credit risk and
operational risk. In PS17/23 issued in December 2023, the PRA issued a near
final approach for several areas, including operational risk with confirmation
for the remaining areas, including credit risk expected by June 2024.
In February 2023, the PRA issued CP4/23 'The Strong and Simple Framework:
Liquidity and Disclosure requirements for Simpler-regime Firms' setting out
their initial proposals for a strong and simple prudential framework, as well
as the Phase 1 proposed liquidity and Pillar 3 disclosure-related rules for
the new regime. In December 2023, the PRA confirmed the final eligibility
criteria for the regime in PS15/23, the renaming of the regime to the Small
Domestic Deposit Takers ('SDDT') regime and confirmed the Phase 1
implementation date as 1 July 2024. It also confirmed the associated liquidity
and Pillar 3 rules for SDDT firms.
The SDDT capital rules are the subject of a further consultation, expected by
June 2024. The PRA has indicated that the Basel 3.1 rules will be the starting
point for designing the SDDT regime capital requirements. However, the launch
date for the SDDT capital regime is still to be announced.
PS17/23 also confirmed that firms that are eligible for and have applied to
join the SDDT regime do not need to adopt Basel 3.1 and can instead remain on
the current UK Capital Requirements Regulation regime until the capital rules
applicable to the SDDT regime are launched. The Group expects to be eligible
to join the SDDT regime.
The Group has undertaken an impact analysis of the CP16/22 proposals to
understand the potential impact under the proposed full rules, which is
broadly neutral to risk-weighted assets. The Group will decide whether it will
adopt the full rules or defer and adopt the SDDT regime in 2024.
During May 2023, the PRA issued PS5/23 'Model risk management principles for
banks' setting out stronger governance expectations for model governance to
address observed shortcomings within the industry. A new supervisory statement
SS1/23, incorporating these revised expectations was also issued, however the
final policy applies only to banks adopting the internal ratings model
approach to capital. Therefore the Group is not directly impacted by the
changes. The PRA is proposing the development of specific requirements for
SDDT firms, which are expected to adopt a more proportionate approach.
During June 2023, the PRA issued CP10/23 'Solvent exit planning for
non-systemic banks and building societies'. This proposes a new requirement
for non-systemic banks, such as Secure Trust Bank, to develop solvent exit
planning documentation as an additional approach that could potentially be
used as an alternative to resolution. The proposed implementation date is July
2025.
The UK Countercyclical Capital Buffer ('CCyB') rate increased from 1% to 2% on
5 July 2023, as previously announced by the Financial Policy Committee
('FPC'). The FPC has stated that it will continue to monitor the CCyB rate due
to the current uncertainty around the economic outlook.
Conduct regulation
The FCA's new Consumer Duty came into force on 31 July 2023. In the run up to
the deadline, the regulator published Dear CEO portfolio letters and podcasts,
setting out its expectations and approach to supervision, and findings from
its reviews of fair value frameworks. The Group's preparations included a
comprehensive review of Consumer Finance and Savings products and customer
experience.
At the end of July 2023, the FCA set out a 14-point action plan on cash
savings to ensure banks are passing on interest rate rises to savers
appropriately, communicating with customers much more effectively and offering
them better savings rate deals.
During the year, the FCA has continued to focus on supporting consumers, who
are struggling with the cost of living. In May 2023, it published a
consultation on protections for borrowers in financial difficulty, proposing
how they intend to incorporate aspects of the Tailored Support Guidance into
the FCA's sourcebooks. In June, the FCA joined other regulators to call on
firms to help struggling customers.
The FCA and PRA released proposals in September 2023 to promote diversity and
inclusion in regulated financial services firms, aimed at cultivating
healthier work environments and tapping into a wider talent pool.
In December 2023, the Payment Services Regulator published its final policy
statement and direction on fighting authorised push payment scams, including
all accounts capable of receiving faster payments within the scope.
During June 2023, the International Sustainability Standards Board ('ISSB')
issued the first two Sustainability Disclosure Standards, S1 and S2 (IFRS S1
and S2). They set requirements for the disclosure of sustainability-related
financial information and climate-related disclosures, respectively. The
proposals are still to be incorporated into FCA guidance and the current
expectation is that the adoption date is likely to be 2025. As a listed
entity, the Group already falls within scope of the current Task Force on
Climate-related Financial Disclosures ('TCFD') requirements, the proposed new
standards build on what has already been developed.
In January 2024, the FCA announced it was to undertake a review of
discretionary commission arrangements in the motor finance market. Vehicle
Finance sometimes operated these arrangements until June 2017, ahead of the
FCA banning their use in January 2021. We believe that the overall proportion
of loans where we used discretionary commission arrangements was small and for
a shorter period, relative to the industry in general. The FCA plans to set
out its next steps in Q3 2024, when the implications for the industry should
become clearer.
Government and monetary policy
Following a consultation on the optimal structure for UK financial services
post-Brexit, the Financial Services and Markets Act 2023 (the 'FSMA') received
royal assent during June 2023, with the aim of implementing the outcomes of
the Government's future regulatory framework review and to make changes to
update the UK regulatory regime. This allows for sector-wide regulation of
financial services and markets, involving the revocation of EU law and its
replacement with rules-based regulation primarily administered by regulators,
subject to the oversight of Parliament, which is expected to allow for faster
responses to changing conditions.
The Bank of England MPC announced five consecutive increases in the UK Bank
Base Rate over the course of 2023, taking rates up from 3.5% at the end of
December 2022 to 5.25% at 31 December 2023. Rates have been held since August
2023.
Principal risks and uncertainties
Risk management
The effective management of risk is a key part of the Group's strategy and is
underpinned by its Risk Aware value. This helps to protect the Group's
customers and generate sustainable returns for shareholders. The Group is
focused on maintaining sufficient levels of capital, liquidity and operational
control, and acting in a responsible way.
The Group's Chief Risk Officer is responsible for leading the Group's Risk
function, which is independent from the Group's operational and commercial
teams. The Risk function is responsible for designing and overseeing the
embedding of appropriate risk management frameworks, processes and controls,
to enable key risks to be identified, assessed, monitored and accepted or
mitigated in line with the Group's risk appetite. The Group's risk management
practices are regularly reviewed and enhanced to reflect changes in its
operating environment. The Chief Risk Officer is responsible for reporting to
the Board on the Group's principal risks and how they are being managed
against agreed risk appetite.
Risk appetite
The Group has identified the risk drivers and major risk categories relevant
to the business, which has enabled it to agree a suite of risk appetite
statements and metrics to underpin the strategy of the Group. The Board
approves the Group's risk appetite statements annually and these define the
level and type of risk that the Group is prepared to accept in the achievement
of its strategic objectives.
Risk culture
A strong risk-aware culture is integral to the successful delivery of the
Group's strategy and the effective management of risk.
The Group's risk culture is shaped by a range of factors including risk
appetite, risk frameworks and policies, values and behaviours, as well as a
clear tone from the top.
The Group looks to continually enhance its risk culture, and in 2023,
performed an assessment of its risk culture against standards based on
industry best practice and guidance from the Institute of Risk Management.
Risk governance
The Group's approach to managing risk is defined within its Enterprise-Wide
Risk Management Framework. This provides a clear risk taxonomy and provides an
overarching framework for risk management supported by frameworks and policies
for individual risk disciplines. These frameworks set the standards for risk
identification, assessment, mitigation, monitoring and reporting.
The Group's risk management frameworks, policies and procedures are regularly
reviewed and updated to reflect the evolving risks that the Group faces in its
business activities. They support decision-making across the Group and are
designed to ensure that risks are appropriately managed and reported via
risk-specific committees.
Established risk committees are in place at Board, Group and individual
business unit level to enable clear oversight of risk management, including
robust risk identification and mitigation across the Group.
An Executive Risk Committee, chaired by the Chief Risk Officer, reviews key
risk management information from across all risk disciplines, with material
issues escalated to the Executive Committee and/or the Risk Committee of the
Board, as required.
The Group operates a 'Three Lines of Defence' model for the management of its
risks. The Three Lines of Defence, when taken together, control and manage
risks in line with the Group's risk appetite. The three lines are:
· First line: all employees within the business units and
associated support functions, including Operations, Finance, Treasury, Human
Resources and Legal. The first line has ownership of and primary
responsibility for their risks.
· Second line: specialist risk management and compliance teams
reporting directly into the Chief Risk Officer, covering Credit risk,
Operational risk, Information Security, Prudential risk, Compliance and
Conduct risk and Financial Crime risk. The second line are responsible for
developing frameworks to assist the first line in the management of their
risks and providing oversight and challenge designed to ensure they are
managed within appetite; and
· Third line: is the Internal Audit function that provides
independent assurance on the effectiveness of risk management across the
Group.
Board and Board Committees
· See Corporate Governance section in the Annual Report and Accounts
Group Executive Committee
Chair: Chief Executive Officer
· Provides an executive oversight of the ongoing safe and
profitable operation of the Group. It reports to the Board through the Chief
Executive Officer.
· Responsible for the execution of the strategy of the Group at
the direction of the Chief Executive Officer.
Executive Risk Committee Assets and Liabilities Committee ('ALCO')
Chair: Chief Risk Officer
Chair: Chief Financial Officer
· Responsible for overseeing the Group's risk profile, its adherence to · Responsible for implementing and controlling the liquidity, and asset and
regulatory compliance and monitoring these against the risk appetite set by liability management risk appetite of the Group, providing high level control
the Board. over the Group's balance sheet and associated risks.
· Monitors the effective implementation of the risk management framework · Sets and controls capital deployment, treasury strategy guidelines and
across the Group. limits, and focuses on the effects of future plans and strategy on the Group's
assets and liabilities.
Credit Model Other
Committees
Governance Committee
Committees
Responsible for making decisions about lending, inclusive of oversight of Responsible for understanding, challenging and assessing risk The activities of the Executive Risk Committee and ALCO are also supported by
credit scorecards and modelling.
and appropriateness of statistical and financial models and to challenge model various specialist sub-committees and working groups, covering: Liquidity,
assumptions and suitable model validation. Financial Crime, Compliance and Regulation, Operational Risk, Assumptions and
Climate Change.
Principal risks
Executive management performs ongoing monitoring and assessment of the
principal risks facing the Group, including those that would threaten its
business model, future performance, solvency or liquidity.
Further details of the principal risks and the changes to risk profile seen
during the 2023 financial year are set out below.
The Group also regularly reviews strategic and emerging risks and analysis has
been included to detail output of these reviews for 2023. Notes 37 to 40 to
the Financial Statements provide further analysis of credit, liquidity, market
and capital risks. Emerging risks are identified in line with the Group's
Enterprise-Wide Risk Management Framework, utilising a 'top-down' approach
with Group Executive workshops and a 'bottom-up' approach through the business
unit risk and control self assessment process.
Further details of the Group's risk management framework, including risk
appetite, can be found on the Group's website:
www.securetrustbank.com/riskmanagement.
Credit risk
Description
· The risk of loss to the Group from the failure of clients,
customers or counterparties to honour fully their obligations to the firm,
including the whole and timely payment of principal, interest, collateral or
other receivables.
Mitigation
· The Group has a defined Credit risk framework, which sets out
how Credit risk is managed and mitigated across the Group.
· Risk appetite is cautious with the Group focusing on sectors
and products where it has deep experience.
· Specialist Credit teams are in place within each business area
to enable new lending to be originated in line with the Group's risk appetite.
· For Business Finance, lending is secured against assets, with
Real Estate Finance lending, the majority of which is at fixed rates, secured
by property at conservative loan-to-value ratios. Short dated Commercial
Finance lending is secured across a range of assets, including debtors, stock
and plant and machinery.
· For Consumer Finance, security is taken for Vehicle Finance
lending and Retail Finance is unsecured, however positioned towards lower risk
sectors. The vast majority of Retail Finance lending is interest free for
consumers, with remaining consumer lending at fixed rates, which mitigates the
direct impact of rising interest rates on affordability. Consumer Credit risk
is assessed through a combination of risk scorecards, credit and affordability
policy rules.
· Portfolio performance is tracked closely and reported via
specialist management review meetings into the Executive and Board Risk
Committees, with the ability to make changes to policy, affordability
assessments or scorecards on a dynamic basis.
· Management monitors and assesses concentration risk for all
lending against control limits. The diversification of lending activities and
secured nature of larger exposures mitigates the exposure of the Group to
concentration risk.
Change during the year Heightened
During 2023, economic conditions continued to be challenging in the UK, with
high levels of inflation and cost of living pressures for consumers. In
addition, both consumers and businesses were impacted by rising interest rates
throughout the period.
The Group's lending portfolios performed satisfactorily in 2023. Retail
Finance arrears continue to be low by historical comparison following a move
into lower risk sectors over the last few years. Vehicle Finance has witnessed
good quality new business acquisition as the Group tightened its criteria in
light of the increased cost of living. However, Vehicle Finance collections
performance in the year was impacted as the Group undertook a review of its
collections policies, procedures and forbearance options to ensure they
deliver good outcomes for customers.
The Real Estate Finance and Commercial Finance businesses performed
satisfactorily at a portfolio level, with key risk metrics remaining within
appetite. Some customers have been impacted by the rising interest rate
environment; however, they have been managed closely with low levels of
customer defaults leading to increased provisions.
One material loss was recorded in the first half of the year, within
Commercial Finance, in relation to a long-running problem debt case. The
circumstances around the particular case were unique, with a lessons learned
exercise confirming no similar concerns across the portfolio. In addition,
within Real Estate Finance, impairment charges increased, which were primarily
attributable to a higher provision on one development loan.
The overall rating for the year is driven by the continuing uncertainty in the
external economic environment.
Liquidity and Funding risk
Description
Liquidity risk is the risk that the Group is unable to meet its liquidity
obligations as they fall due or can only do so at excessive cost. Funding risk
is the risk that the Group is unable to raise or maintain funds to support
asset growth, or the risk arising from an unstable funding profile that could
result in higher funding costs.
Mitigation
Liquidity and Funding risk is managed in line with the Group's Prudential Risk
Management Framework. The Group has a defined set of liquidity and funding
risk appetite measures that are monitored and reported, as appropriate.
The Group manages its liquidity and funding in line with internal and
regulatory requirements, and at least annually assesses its exposure to
liquidity risks and adequacy of its liquidity resources as part of the Group's
Internal Liquidity Adequacy Assessment Process.
In line with the Prudential Regulation Authority's ('PRA') self-sufficiency
rule, the Group always seeks to maintain liquid resources that are adequate,
both as to amount and quality, and managed to ensure that there is no
significant risk that its liabilities cannot be met as they fall due under
stressed conditions. The Group defines liquidity adequacy as the:
· ongoing ability to accommodate the refinancing of liabilities
upon maturity and other means of deposit withdrawal at acceptable cost;
· ability to fund asset growth; and
· otherwise, capacity to meet contractual obligations through
unconstrained access to funding at reasonable market rates.
The Group conducts regular and comprehensive liquidity stress testing to
identify sources of potential liquidity strain and to check that the Group's
liquidity position remains within the Board's risk appetite and prudential
regulatory requirements.
Contingency funding plans
The Group maintains a Recovery Plan that sets out how the Group would maintain
sufficient liquidity to remain viable during a severe liquidity stress event.
The Group also maintains access to the Bank of England liquidity schemes,
including the Discount Window Facility.
Change during the year Stable
The Group has maintained all liquidity and funding ratios in excess of Board
and regulatory requirements throughout the year. A significant level of high
quality liquid assets, predominately held as cash at the Bank of England,
continue to be maintained to ensure that obligations are met as they fall due.
The Group's funding base has a very high proportion of retail depositors
covered by the Financial Services Compensation Scheme protection.
Capital risk
Description
Capital risk is the risk that the Group will have insufficient capital
resources to meet minimum regulatory requirements and to support planned
levels of growth.
The Group adopts a conservative approach to managing its capital. It annually
assesses the adequacy of the amount and quality of capital held under stress
as part of the Group's Internal Capital Adequacy Assessment Process ('ICAAP').
Mitigation
Capital management is defined as the operational and governance processes by
which capital requirements are identified and capital resources maintained and
allocated, such that regulatory requirements are met while optimising returns
and supporting sustainable growth.
The Group manages its capital requirements on a forward-looking basis against
minimum regulatory requirements and the Board's risk appetite to ensure
capital resources are sufficient to support planned levels of growth. The
Group will take opportunities to increase overall levels of capital and to
optimise its capital stack as and when appropriate. In addition to the ICAAP,
the Group performs regular budgeting and reforecasting exercises that consider
a five-year time horizon. These forecasts are used to plan for future lending
growth at a rate that both increases year-on-year profits and maintains a
healthy capital surplus, taking into consideration the impact of known and
anticipated future regulatory changes. The Group also models various stressed
scenarios looking over a five-year time horizon, which consider a range of
growth rates over those years as part of the viability and going concern
assessments.
Further information on the Group's capital requirement is contained within the
Pillar 3 disclosures, which are published as a separate document on our
website (www.securetrustbank.com/pillar3).
Change during the year Stable
The Group continues to meet its capital ratio measures, taking into
consideration the increased requirements driven by planned growth and any
change in regulatory requirements, and continues to operate within its risk
appetite. In February 2023, the Group issued £90.0 million of 10.5 year,
13.0% Fixed Rate Callable Subordinated Notes, which also qualify as Tier 2
regulatory capital (subject to a cap of 25% of Pillar 1 and 2A requirements).
The Group is actively considering regulatory changes proposed through Basel
3.1 and the Interim Capital Regime as part of the Small Domestic Deposit
Takers Regime. Details of the common equity tier 1 ratio, total capital ratio
and leverage ratio are included in the Financial review.
The 2023 ICAAP showed that the Group can continue to meet its minimum
regulatory capital requirements, even under extreme stress scenarios.
Market risk
Description
Market risk is the risk to the Group's earnings and/or value from unfavourable
market movements, such as interest rates and foreign exchange rates. The
Group's market risk primarily arises from interest rate risk. Interest rate
risk refers to the exposure of the Group's financial position, balance sheet
and earnings to movements in interest rates.
The Group's balance sheet is predominantly denominated in GBP, although a
small number of transactions are completed in US Dollars, Euros and other
currencies in support of Commercial Finance customers.
Mitigation
The Group's principal exposure comes from the term structure of interest rate
sensitive items and the sensitivity of the Group's current and future earnings
and economic value to movements in market interest rates. The Group does not
take significant unmatched positions through the application of hedging
strategies and does not operate a trading book. The main contributors to
interest rate risk are:
· the mismatch, or duration, between repricing dates of assets
and liabilities; and
· customer optionality, for example, early repayment of loans in
advance of contractual maturity dates.
The Group uses an interest rate sensitivity gap analysis that informs the
Group of any significant mismatched interest rate risk positions that require
hedging. This takes into consideration the behavioural assumptions for
optionality as approved by ALCO. Risk positions are managed through the
structural matching of assets and liabilities with similar tenors and the use
of vanilla interest rate derivative instruments to hedge the residual
unmatched position and minimise the Group's exposure to interest rate risk.
The Group has a defined set of market risk appetite measures that are
monitored monthly. Interest rate risk in the banking book is measured from an
internal management and regulatory perspective, taking into consideration both
an economic value and earnings-based approach.
The Group monitors its exposure to basis risk and any residual non-GBP
positions. Processes are in place to review and react to movements to the Bank
of England Base Rate.
The Group has no significant exposures to foreign currencies and hedges any
residual currency risks to Sterling.
All such exposures are maintained within the risk appetite set by the Board
and are monitored by ALCO.
Change during the year Stable
Despite continued increases in the Bank of England Base Rate during 2023, the
Group remained within risk appetite in relation to interest rate risk and
market risk throughout the year.
Operational risk
Description
Operational risk is the risk that the Group may be exposed to direct or
indirect loss arising from inadequate or failed internal processes, personnel
and succession, technology/ infrastructure, or from external factors.
The scope of Operational risk is broad and includes business process,
operational resilience, third party risk, Change management, Human Resources,
Information Security and IT risk, including Cyber risk.
Mitigation
The Group has an Operational Risk Framework designed in accordance with the
'Principles for the Sound Management of Operational Risk' issued by the Basel
Committee on Banking Supervision. This framework defines and facilitates a
range of activities, including:
· a risk and control self-assessment process to identify, assess
and mitigate risks across all business units through improvements to the
control environment;
· the governance arrangements for managing and reporting these
risks;
· risk appetite statements and associated thresholds and metrics;
and
· an incident management process that defines how incidents
should be managed and associated remediation, reporting and root-cause
analysis.
The framework is designed to ensure appropriate governance is in place to
provide adequate and effective oversight of the Group's operational risks. The
governance framework includes the Group Operational Risk, Executive Risk and
Board Risk Committees.
The Group has a defined set of qualitative and quantitative operational risk
appetite measures. These measures cover all categories of operational risk and
are reported and monitored monthly.
In addition to the delivery of framework requirements, the Group has focused
on various thematic areas of operational risk in 2023, including supplier
management, operational resilience, business processes and data management.
Change during the year Stable
The Group uses the 'The Standardised Approach' for assessing its operational
risk capital, in recognition of the enhancements made to its framework and
embedding it across the Group. The Group continues to invest in resource,
expertise and systems to support the effective management of operational risk.
In 2023, the Group has continued to enhance these standards and has introduced
several improvements to the control frameworks in place across its operational
risks. Overall, the assessment is that the level of risk has remained stable.
Model risk
Description
Model risk is the potential for adverse consequences from model errors or the
inappropriate use of modelled outputs to inform business decisions.
The Group has multiple models that are used, amongst other things, to support
pricing, strategic planning, budgeting, forecasting, regulatory reporting,
credit risk management and provisioning.
Model risk has been elevated to a principal risk following a review of the
Group's Enterprise-Wide Risk Management Framework.
Mitigation
The Group has a Model Risk Management policy that governs its approach to
model risk and sets out:
· model risk appetite;
· model and model risk definitions; and
· roles and responsibilities for model risk management.
As required within its policy, the Group maintains a model inventory and a
risk register incorporating specific model-related risks.
Change during the year Stable
The Group has delivered significant improvements to its Model Governance
Framework in 2023. Whilst the Group is not within the scope of the PRA's
Supervisory Statement 1/23, it has aligned its model risk management practices
to this standard. Working with a third party expert in the field of model
governance, the model risk management framework including policies,
procedures, model development standards and model validation requirements have
all been rewritten and trained out to senior management and model users. A
team has been created to oversee model risk management and to undertake
independent validations of the Group's high risk models.
Compliance and Conduct risk
Description
The risk that the Group's products and services, and the way they are
delivered, or the Group's failure to be compliant with all relevant regulatory
requirements, result in poor outcomes for customers or markets in which we
operate, or cause harm to the Group. This could be as a direct result of poor
or inappropriate execution of our business activities or behaviour from our
employees.
Mitigation
The Group manages this risk through its Compliance and Conduct Risk Management
Framework. The Group takes a principle-based approach, which includes retail
and commercial customers in our definition of 'customer', with coverage across
all business units and both regulated and unregulated activities.
Risk management activities follow the Enterprise-Wide Risk Management
Framework, through identifying, assessing and managing risks, governance
arrangements and reporting risks against Group risk appetite. Arrangements
include horizon-scanning of regulatory changes, oversight of regulatory
incidents and assurance activities conducted by the three lines of defence,
including the second line Compliance Monitoring programme.
The Group's horizon-scanning activities track industry and regulatory
developments, including the implementation of the Basel 3.1 standard and the
Small Domestic Deposit Takers proposal, and the PRA and FCA's diversity and
inclusion proposals.
Key focus areas across the finance industry in 2023 have been the
implementation of the new Consumer Duty, the FCA's Cost of Living Forbearance
review that stemmed from its Borrowers in Financial Difficulty ('BiFD') report
in 2022, and the developments in model risk management.
Change during the year Heightened
The overall rating for the year is driven by the increased regulatory focus on
conduct matters, including the new Consumer Duty, cost of living and
forbearance across the motor finance sector following the FCA's BiFD review,
and historic discretionary motor finance commissions.
The Group completed the necessary activities to achieve the regulatory
timeframe to implement the new Consumer Duty, including product and value
assessments and consumer understanding testing. A programme of activities
continues to embed further the Duty across the consumer businesses.
During H2 2023, the Group engaged in formal discussions with the FCA about its
collections processes, procedures and policies in Vehicle Finance and engaged
external support to assist. Where necessary, we are enhancing further our
approach to enable good outcomes to be delivered in line with the Group's
purpose and values.
In January 2024, the FCA announced it was undertaking a review of
discretionary commission arrangements in the motor finance market. Vehicle
Finance sometimes operated these arrangements until June 2017, ahead of the
FCA banning their use in January 2021. We believe that the overall proportion
of loans where we used discretionary commission arrangements was small and for
a shorter period, relative to the industry in general. The Group is tracking
developments in order to respond, when the implications for the industry
become clearer.
Financial Crime risk
Description
The risk that the Group's products and services will be used to facilitate
financial crime, resulting in harm to its customers, the Group or third
parties, and the Group fails to protect them by not having effective systems
and controls. Financial Crime includes anti-money laundering, terrorist
financing, proliferation financing, sanctions restrictions, modern slavery,
human trafficking, fraud and the facilitation of tax evasion. The Group may
incur significant remediation costs to rectify issues, reimburse losses
incurred by customers and address regulatory censure and penalties.
Mitigation
We operate in a constantly developing financial crime environment and are
exposed to financial crime risks of varying degrees across all areas of the
Group. The Group is focused on maintaining effective systems and controls,
alongside vigilance against all forms of financial crime and meeting our
regulatory obligations.
The Group has a Financial Crime Framework designed to meet regulatory and
legislative obligations, which includes:
· Mandatory annual colleague training and awareness initiatives.
· Regular reviews of our suite of financial crime policies,
standards and procedures, checking they remain up to date and address any
legislative/regulatory change and emerging risks.
· Detection, transaction monitoring and screening technologies.
· Extensive recruitment policy to screen potential employees.
· Horizon-scanning and regular management information production
and analysis conducted to identify emerging threats, trends and typologies, as
well as preparing for new legislation and regulation.
· Financial crime-focused governance with risk committees
providing senior management oversight, challenge and risk escalation.
· Intelligence shared through participating in key industry
events such as those hosted by UK Finance and other networks.
Change during the year Stable
Enhancements to the Group's financial crime control environment have continued
with a focus on financial crime capabilities and systems and controls. We are
closely monitoring changes to fraud and financial crime regulation and
guidance and responding to them.
Climate Change risk
Description
Climate change, and society's response to it, present risks to the UK
financial services sector, with some of these only fully crystallising over an
extended period. The Group is exposed to physical and transition risks arising
from climate change.
Mitigation
The Group has established processes to monitor our risk exposure to both the
potential 'physical' effects of climate change and the 'transitional' risks
from the UK's adjustment towards a carbon neutral economy. The Group has
developed a new role to support the deployment of its Climate Strategy and
enable pivotal change and development across the Group. The activities remain
a core element of our Environmental, Social and Governance approach.
Stress testing work has been enhanced for 2023, for our Vehicle Finance and
Real Estate Finance businesses to test the resilience of our portfolios and
strategies to manage the risks and opportunities of climate change. Further
detail is provided within the Climate-related financial disclosures section of
the Annual Report and Accounts.
Change during the year Stable
The Group's direct exposure to the physical impacts of climate change remains
relatively limited, given its footprint and areas of operation. However, it
has established robust controls designed to manage the associated risks and
will continue to develop its business plans in the future as the risks evolve.
Disclosures are made within the Climate-related financial disclosures section
of the Annual Report and Accounts in line with the guidance from the 'Task
Force on Climate-Related Financial Disclosures. Specific detail on each of the
key risks identified and mitigation are covered within the Strategy section of
the Annual Report and Accounts. The Group continues to monitor the evolving
climate disclosure landscape and regulatory requirements and expectations,
including transition planning.
Strategic and emerging risks
In addition to the principal risks disclosed above, the Board and Executive
Committee regularly consider strategic and emerging risks, including key
factors, trends and uncertainties that could impact the performance of the
Group.
The key strategic risk identified by the Executive and reported through to the
Board Risk Committee was the macroeconomic environment in the UK. The Group
operates exclusively within the UK and therefore its performance is influenced
by the performance of the UK economy. Weaknesses in economic position or
outlook can impact the demand for the Group's products, returns that can be
achieved and the level of impairments.
2023 saw rapid increases in inflation, driven principally by increases in
energy costs and other supply chain and labour market issues. The Bank of
England response to higher inflation has been to increase interest rates, with
continued upward pressure throughout 2023, creating uncertainty for consumers
and businesses.
The Group has taken proactive action to reflect these changes in lending
parameters to continue to operate within its credit risk appetite and maintain
support for its customers.
Whilst material direct impacts have not yet been seen, the Group continues to
monitor closely the macroeconomic environment to assess the impact of these
changes on its customers and financial performance.
Director's responsibility statement
The Directors are responsible for preparing the Annual Report and the
Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Financial Statements for each
financial year. Under that law the Directors are required to prepare the Group
Financial statements in accordance with United Kingdom adopted international
accounting standards. The Financial Statements also comply with International
Financial Reporting Standards (IFRSs) as issued by the IASB. The Directors
have also chosen to prepare the parent Company Financial Statements under
United Kingdom adopted international accounting standards. Under company law
the Directors must not approve the Financial Statements unless they are
satisfied that they give a true and fair view of the state of affairs of the
Company and of the profit or loss of the Company for that period.
In preparing these Financial Statements, International Accounting Standard 1
requires that Directors:
· properly select and apply accounting policies;
· present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable information;
· provide additional disclosures when compliance with the
specific requirements of the financial reporting framework are insufficient to
enable users to understand the impact of particular transactions, other events
and conditions on the entity's financial position and financial performance;
and
· make an assessment of the company's ability to continue as a
going concern.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the Financial Statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
Responsibility statement
Each of the Directors who are in office at the date of this report and whose
names and roles are listed in the Annual Report and Accounts (pages 66 to 68)
confirm that to the best of our knowledge:
· the Financial Statements, prepared in accordance with the
relevant financial reporting framework, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the Company and
the undertakings included in the consolidation taken as a whole;
· the Strategic Report includes a fair review of the development
and performance of the business and the position of the Company and the
undertakings included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they face; and
· the Annual Report and Financial Statements, taken as a whole,
are fair, balanced and understandable and provide the information necessary
for shareholders to assess the Company's position and performance, business
model and strategy.
Consolidated statement of comprehensive income
For the year ended 31 December
Note 2023 Restated¹
£million 2022
£million
Income statement
Continuing operations
Interest income and similar income 4.1 304.0 203.0
Interest expense and similar charges 4.1 (136.5) (50.4)
Net interest income 4.1 167.5 152.6
Fee and commission income 4.2 17.3 17.4
Fee and commission expense 4.2 (0.1) (0.4)
Net fee and commission income 4.2 17.2 17.0
Operating income 184.7 169.6
Net impairment charge on loans and advances to customers 16 (43.2) (38.2)
Gains on modification of financial assets 0.3 1.1
Fair value and other gains/(losses) on financial instruments 5 0.5 (0.3)
Operating expenses 6 (99.7) (93.2)
Profit before income tax from continuing operations before exceptional items 42.6 39.0
Exceptional items 8 (6.5) -
Profit before income tax from continuing operations 36.1 39.0
Income tax expense 9 (9.7) (9.4)
Profit for the year from continuing operations 26.4 29.6
Discontinued operations
(Loss)/profit before income tax from discontinued operations 10 (2.7) 5.0
Income tax credit/(expense) 10 0.6 (0.9)
(Loss)/profit for the year from discontinued operations 10 (2.1) 4.1
Profit for the year 24.3 33.7
Other comprehensive income
Items that may be reclassified to the income statement
Cash flow hedge reserve movements - (0.8)
Reclassification to the income statement 0.6 0.1
Taxation (0.1) 0.2
Other comprehensive income/(loss) for the year, net of income tax 0.5 (0.5)
Total other comprehensive income 24.8 33.2
Profit attributable to equity holders of the Company 24.3 33.7
Total comprehensive income attributable to equity holders of the Company 24.8 33.2
Earnings per share for profit attributable to the equity holders of the
Company during the year (pence per share)
Basic earnings per ordinary share 11.1 129.6 180.5
Diluted earnings per ordinary share 11.2 126.1 174.7
Basic earnings per ordinary share - continuing operations 140.8 158.5
Diluted earnings per ordinary share - continuing operations 137.0 153.4
1. Restated to reflect a change in accounting policy relating to land and
buildings, which are now presented at historical cost. See Note 1.3 for
further details.
Consolidated statement of financial position
As at 31 December
Note 2023 Restated¹ Restated¹
£million 2022 2021
£million £million
ASSETS
Cash and Bank of England reserve account 351.6 370.1 235.7
Loans and advances to banks 13 53.7 50.5 50.3
Debt securities - - 25.0
Loans and advances to customers 14, 15 3,315.3 2,919.5 2,530.6
Fair value adjustment for portfolio hedged risk 17 (3.9) (32.0) (3.5)
Derivative financial instruments 17 25.5 34.9 3.8
Assets held for sale - - 1.3
Investment property 18 - - 4.7
Property, plant and equipment 19 10.8 9.7 8.8
Right-of-use assets 20 1.8 1.5 2.2
Intangible assets 21 5.9 6.6 6.9
Current tax assets 0.1 - 0.8
Deferred tax assets 23 4.3 5.6 7.2
Other assets 24 12.9 13.4 11.9
Total assets 3,778.0 3,379.8 2,885.7
LIABILITIES AND EQUITY
Liabilities
Due to banks 25 402.0 400.5 390.8
Deposits from customers 26 2,871.8 2,514.6 2,103.2
Fair value adjustment for portfolio hedged risk 17 (1.4) (23.0) (5.3)
Derivative financial instruments 17 22.0 26.7 6.2
Liabilities directly associated with assets held for sale - - 2.0
Current tax liabilities - 0.8 -
Lease liabilities 27 2.3 2.1 3.1
Other liabilities 28 37.7 78.1 31.3
Provisions for liabilities and charges 29 6.0 2.5 1.3
Subordinated liabilities 30 93.1 51.1 50.9
Total liabilities 3,433.5 3,053.4 2,583.5
Equity attributable to owners of the parent
Share capital 32 7.6 7.5 7.5
Share premium 83.8 82.2 82.2
Other reserves 33 (1.7) (1.1) (0.3)
Retained earnings 254.8 237.8 212.8
Total equity 344.5 326.4 302.2
Total liabilities and equity 3,778.0 3,379.8 2,885.7
1. Restated to reflect a change in accounting policy relating to land and
buildings, which are now presented at historical cost. See Note 1.3 for
further details.
Company statement of financial position
As at 31 December
Note 2023 Restated¹ Restated¹
£million 2022 2021
£million £million
ASSETS
Cash and Bank of England reserve account 351.6 370.1 235.7
Loans and advances to banks 13 53.0 48.9 47.4
Debt securities - - 25.0
Loans and advances to customers 14, 15 3,315.3 2,919.5 2,450.3
Fair value adjustment for portfolio hedged risk 17 (3.9) (32.0) (3.5)
Derivative financial instruments 17 25.5 34.9 3.8
Investment property 18 0.9 1.0 5.7
Property, plant and equipment 19 6.3 4.9 3.9
Right-of-use assets 20 1.6 1.3 1.5
Intangible assets 21 3.5 4.4 5.4
Investments in group undertakings 22 5.9 5.7 4.3
Current tax assets - - 1.5
Deferred tax assets 23 4.3 5.3 6.9
Other assets 24 14.4 15.1 99.8
Total assets 3,778.4 3,379.1 2,887.7
LIABILITIES AND EQUITY
Liabilities
Due to banks 25 402.0 400.5 390.8
Deposits from customers 26 2,871.8 2,514.6 2,103.2
Fair value adjustment for portfolio hedged risk 17 (1.4) (23.0) (5.3)
Derivative financial instruments 17 22.0 26.7 6.2
Current tax liabilities 0.3 0.6 -
Lease liabilities 27 2.1 1.9 2.3
Other liabilities 28 44.7 85.9 43.8
Provisions for liabilities and charges 29 5.6 2.0 1.3
Subordinated liabilities 30 93.1 51.1 50.9
Total liabilities 3,440.2 3,060.3 2,593.2
Equity attributable to owners of the parent
Share capital 32 7.6 7.5 7.5
Share premium 83.8 82.2 82.2
Other reserves 33 (1.7) (1.1) (0.3)
Retained earnings 248.5 230.2 205.1
Total equity 338.2 318.8 294.5
Total liabilities and equity 3,778.4 3,379.1 2,887.7
1. Restated to reflect a change in accounting policy relating to land and
buildings, which are now presented at historical cost. See Note 1.3 for
further details.
The Company has elected to take the exemption under section 408 of the
Companies Act 2006 not present the parent company income statement. The profit
for the parent company for the year of £25.6 million is presented in the
Company statement of changes in equity.
Consolidated statement of changes in equity
Share capital Share premium Other reserves
£million £million
Cash flow hedge reserve Revaluation Own Retained earnings Total
£million reserve shares £million £million
£million £million
Balance at 1 January 2022 7.5 82.2 (0.3) 1.3 - 211.7 302.4
Land and buildings prior year restatement - - - (1.3) - 1.1 (0.2)
net of tax (see Note 1.3)
Balance at 1 January 2022 (restated) 7.5 82.2 (0.3) - - 212.8 302.2
Total comprehensive income for the year
Profit for 2022 - - - - - 33.7 33.7
Total other comprehensive income, net of income tax
Cash flow hedge reserve movements - - (0.7) - - - (0.7)
Tax on cash flow hedge reserve movements - - 0.2 - - - 0.2
Total other comprehensive loss - - (0.5) - - - (0.5)
Total comprehensive income for the year - - (0.5) - - 33.7 33.2
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Purchase of own shares - - - - (0.3) - (0.3)
Dividends paid - - - - - (10.7) (10.7)
Share-based payments - - - - - 2.0 2.0
Total contributions by and distributions to owners - - - - (0.3) (8.7) (9.0)
Balance at 31 December 2022 7.5 82.2 (0.8) - (0.3) 237.8 326.4
Total comprehensive income for the year
Profit for 2023 - - - - - 24.3 24.3
Total other comprehensive income, net of income tax
Cash flow hedge reserve movements - - 0.6 - - - 0.6
Tax on cash flow hedge reserve movements - - (0.1) - - - (0.1)
Total other comprehensive income - - 0.5 - - - 0.5
Total comprehensive income for the year - - 0.5 - - 24.3 24.8
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Purchase of own shares - - - - (1.2) - (1.2)
Sale of own shares - - - - 0.1 - 0.1
Issue of shares 0.1 1.6 - - - - 1.7
Dividends paid - - - - - (8.4) (8.4)
Share-based payments - - - - - 1.1 1.1
Total contributions by and distributions to owners 0.1 1.6 - - (1.1) (7.3) (6.7)
Balance at 31 December 2023 7.6 83.8 (0.3) - (1.4) 254.8 344.5
Company statement of changes in equity
Other reserves
Share capital Share premium Cash flow hedge reserve Revaluation Own Retained earnings Total
£million £million £million reserve shares £million £million
£million £million
Balance at 1 January 2022 7.5 82.2 (0.3) 0.7 - 204.1 294.2
Land and buildings prior year restatement - - - (0.7) - 1.0 0.3
net of tax (see Note 1.3)
Balance at 1 January 2022 (restated) 7.5 82.2 (0.3) - - 205.1 294.5
Total comprehensive income for the year
Profit for 2022 - - - - - 33.8 33.8
Total other comprehensive income, net of income tax
Cash flow hedge reserve movements - - (0.7) - - - (0.7)
Tax on cash flow hedges reserve movements - - 0.2 - - - 0.2
Total other comprehensive loss - - (0.5) - - - (0.5)
Total comprehensive income for the year - - (0.5) - - 33.8 33.3
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Own shares - - - - (0.3) - (0.3)
Dividends paid - - - - - (10.7) (10.7)
Share-based payments - - - - - 2.0 2.0
Total contributions by and distributions to owners - - - - (0.3) (8.7) (9.0)
Balance at 31 December 2022 7.5 82.2 (0.8) - (0.3) 230.2 318.8
Total comprehensive income for the year
Profit for 2023 - - - - - 25.6 25.6
Total other comprehensive income, net of income tax
Cash flow hedge reserve movements - - 0.6 - - - 0.6
Tax on cash flow hedge reserve movements - - (0.1) - - - (0.1)
Total other comprehensive income - - 0.5 - - - 0.5
Total comprehensive income for the year - - 0.5 - - 25.6 26.1
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Purchase of own shares - - - - (1.2) - (1.2)
Sale of own shares - - - - 0.1 - 0.1
Issue of shares 0.1 1.6 - - - - 1.7
Dividends paid - - - - - (8.4) (8.4)
Share-based payments - - - - - 1.1 1.1
Total contributions by and distributions to owners 0.1 1.6 - - (1.1) (7.3) (6.7)
Balance at 31 December 2023 7.6 83.8 (0.3) - (1.4) 248.5 338.2
Consolidated statement of cash flows
For the year ended 31 December
Note 2023 2022
£million £million
Cash flows from operating activities
Profit for the year 24.3 33.7
Adjustments for:
Income tax expense 9 9.1 10.3
Depreciation of property, plant and equipment 19 0.9 1.2
Depreciation of right-of-use assets 20 0.7 0.7
Amortisation of intangible assets 21 1.2 1.4
Loss on disposal of property, plant and equipment, right of use assets and 0.2 1.4
intangible assets
Impairment charge on loans and advances to customers 43.2 39.0
Share-based compensation 34 1.1 2.0
Gain on disposal of loan books 10 - (8.9)
Provisions for liabilities and charges 29 8.5 -
Other non-cash items included in profit before tax (0.8) 1.0
Cash flows from operating profits before changes in operating assets and 88.4 81.8
liabilities
Changes in operating assets and liabilities:
- loans and advances to customers (439.0) (497.1)
- loans and advances to banks (1.3) 0.6
- other assets 0.4 (1.5)
- deposits from customers 357.2 411.4
- provisions for liabilities and charges utilisation (4.7) (1.1)
- other liabilities (37.8) 45.6
Income tax paid (8.6) (7.0)
Net cash (outflow)/inflow from operating activities (45.4) 32.7
Cash flows from investing activities
Consideration on sale of loan books 10 - 81.9
Sale of investment property 18 - 3.3
Maturity and sales of debt securities - 80.0
Purchase of debt securities - (80.0)
Purchase of property, plant and equipment and intangible assets 20, 21 (2.7) (2.7)
Net cash (outflow)/inflow from investing activities (2.7) 82.5
Cash flows from financing activities
Issue of subordinated debt 30 70.0 -
Redemption of subordinated debt 30 (28.8) -
(Repayment)/drawdown of amounts due to banks (0.9) 7.0
Purchase of own shares (1.2) (0.3)
Issue of shares 1.7 -
Dividends paid 12 (8.4) (10.7)
Repayment of lease liabilities 21 (0.9) (1.0)
Net cash inflow/(outflow) from financing activities 31.5 (5.0)
Net (decrease)/increase in cash and cash equivalents (16.6) 110.2
Cash and cash equivalents at 1 January 416.9 306.7
Cash and cash equivalents at 31 December 35 400.3 416.9
Company statement of cash flows
For the year ended 31 December
Note 2023 2022
£million £million
Cash flows from operating activities
Profit for the year 25.6 33.8
Adjustments for:
Income tax expense 9 6.7 6.9
Depreciation of property, plant and equipment 19 0.6 0.7
Depreciation of right-of-use assets 20 0.6 0.4
Amortisation of intangible assets 21 1.0 1.1
Loss on disposal of property, plant and equipment 0.1 -
Impairment charge on loans and advances to customers 43.2 37.8
Share-based compensation 34 0.9 1.6
Dividends received from subsidiaries (10.2) (14.0)
Provisions for liabilities and charges 29 7.2 1.4
Other non-cash items included in profit before tax 1.4 (0.3)
Cash flows from operating profits before changes in operating assets and 77.1 69.4
liabilities
Changes in operating assets and liabilities:
- loans and advances to customers (439.0) (505.7)
- loans and advances to banks (1.3) 0.6
- other assets 8.7 98.7
- deposits from customers 357.2 411.4
- provisions for liabilities and charges utilisation (3.3) (1.1)
- other liabilities (38.6) 44.0
Income tax paid (5.9) (3.0)
Net cash (outflow)/inflow from operating activities (45.1) 114.3
Cash flows from investing activities
Sale of investment property 18 - 3.3
Purchase of subsidiary undertaking 22 - (1.0)
Maturity and sales of debt securities - 80.0
Purchase of debt securities - (80.0)
Purchase of property, plant and equipment and intangible assets 20, 21 (2.2) (0.4)
Net cash (outflow)/inflow from investing activities (2.2) 1.9
Cash flows from financing activities
Issue of subordinated debt 30 70.0 -
Redemption of subordinated debt 30 (28.8) -
(Repayment)/drawdown of amounts due to banks (0.9) 7.0
Purchase of own shares 33 (1.2) (0.3)
Issue of shares 32 1.7 -
Dividends paid 12 (8.4) (10.7)
Repayment of lease liabilities 21 (0.8) (0.7)
Net cash inflow/(outflow) from financing activities 31.6 (4.7)
Net (decrease)/increase in cash and cash equivalents (15.7) 111.5
Cash and cash equivalents at 1 January 415.3 303.8
Cash and cash equivalents at 31 December 35 399.6 415.3
Notes to the consolidated financial statements
1. Accounting policies
The principal accounting policies applied in the preparation of these
consolidated financial statements are set out below, and if applicable,
directly under the relevant note to the consolidated financial statements.
These policies have been consistently applied to all of the years presented,
unless otherwise stated.
1.1. Reporting entity
Secure Trust Bank PLC is a public limited company incorporated in England and
Wales in the United Kingdom (referred to as
'the Company') and is limited by shares. The Company is registered in England
and Wales and has the registered number 00541132. The registered address of
the Company is Yorke House, Arleston Way, Solihull, B90 4LH. The consolidated
financial statements of the Company as at and for the year ended 31 December
2023 comprise Secure Trust Bank PLC and its subsidiaries (together referred to
as 'the Group' and individually as 'subsidiaries'). The Group is primarily
involved in the provision of banking and financial services.
1.2. Basis of presentation
The figures shown for the year ended 31 December 2023 are not statutory
accounts within the meaning of section 435 of the Companies Act 2006. The
statutory accounts for the year ended 31 December 2023 on which the auditors
have given an unqualified audit report and did not contain an adverse
statement under section 498(2) or 498(3) of the Companies Act 2006 will be
delivered to the Registrar of Companies after the Annual General Meeting. The
figures shown for the year ended 31 December 2022 and 31 December 2021 are not
statutory accounts. A copy of the statutory accounts has been delivered to the
Registrar of Companies, which contained an unqualified audit report and did
not contain an adverse statement under section 498(2) or 498(3) of the
Companies Act 2006. This announcement has been agreed with the Company's
auditors for release.
1.3. Property, plant and equipment prior year adjustment
IAS 16 Property, plant and equipment offers a choice of two methods of
measuring the carrying amount of land and buildings:
· The historical model or;
· The revaluation model.
The Group's previous accounting policy was to hold land and buildings at its
revalued amount, being its fair value at the date of valuation less any
subsequent accumulated depreciation. Revaluations were carried out annually at
the reporting date, and movements were recognised in Other Comprehensive
Income, net of any applicable deferred tax. External valuations were performed
on a triennial basis.
Following a review, the Directors have concluded that the historical cost
model is a more appropriate and relevant approach due to the nature of the
Group's business which is that of an owner occupier of property. This will
reduce volatility in the income statement and revaluation reserve, allowing
for a more appropriate presentation of the Group's financial performance.
Furthermore, the historical model approach is adopted by the majority of our
peer group, which will allow for better comparability.
Therefore, under IAS 8.14(b) Accounting Policies, Changes in Accounting
Estimates and Errors, the Group is changing its accounting policy to measure
land and buildings at historical cost less depreciation, less any impairment,
and to adjust the depreciation charge accordingly. The Group's policy to
depreciate buildings over 50 years remains unchanged. This has also resulted
in the removal of the Group's revaluation reserve and associated deferred tax.
Due to the change in accounting policy, the Group is required to restate its
comparatives in accordance with IAS 8.28. A summary of the impact on the
primary statements is as follows:
Statement of financial position As originally stated Prior year adjustment Restated As originally stated Prior year adjustment Restated
1 January 1 January 1 January 1 January 1 January 1 January
2022 2022 2022 2022 2022 2022
Group Group Group Company Company Company
£million £million £million £million £million £million
Property, plant and equipment 9.3 (0.5) 8.8 3.7 0.2 3.9
Deferred tax assets 6.9 0.3 7.2 6.8 0.1 6.9
Other assets 2,869.7 - 2,869.7 2,876.9 - 2,876.9
Total assets 2,885.9 (0.2) 2,885.7 2,887.4 0.3 2,887.7
Total liabilities 2,583.5 - 2,583.5 2,593.2 - 2,593.2
Retained earnings 211.7 1.1 212.8 204.1 1.0 205.1
Revaluation reserve 1.3 (1.3) - 0.7 (0.7) -
Other equity/reserves 89.4 - 89.4 89.4 - 89.4
Total equity 302.4 (0.2) 302.2 294.2 0.3 294.5
Total liabilities and equities 2,885.9 (0.2) 2,885.7 2,887.4 0.3 2,887.7
Statement of financial position As originally stated Prior year adjustment Restated As originally stated Prior year adjustment Restated
1 January 1 January 1 January 1 January 1 January 1 January
2023 2023 2023 2023 2023 2023
Group Group Group Company Company Company
£million £million £million £million £million £million
Property, plant and equipment 10.3 (0.6) 9.7 4.7 0.2 4.9
Deferred tax assets 5.5 0.1 5.6 5.3 - 5.3
Other assets 3,364.5 - 3,364.5 3,368.9 - 3,368.9
Total assets 3,380.3 (0.5) 3,379.8 3,378.9 0.2 3,379.1
Total liabilities 3,053.4 - 3,053.4 3,060.3 - 3,060.3
Retained earnings 237.5 0.3 237.8 230.0 0.2 230.2
Revaluation reserve 0.8 (0.8) - - - -
Other equity/reserves 88.6 - 88.6 88.6 - 88.6
Total equity 326.9 (0.5) 326.4 318.6 0.2 318.8
Total liabilities and equities 3,380.3 (0.5) 3,379.8 3,378.9 0.2 3,379.1
There is negligible impact on the income statement and cash flow statement for
the year ended 31 December 2022.
1.4. Consolidation
Subsidiaries
Subsidiaries are all investees controlled by the Group. The Group controls an
investee when it is exposed, or has rights, to variable returns from its
involvement with the investee, and has the ability to affect those returns
through its power over the investee. Subsidiaries are fully consolidated from
the date on which control is transferred to the Group.
The acquisition method of accounting is used to account for the acquisition of
subsidiaries by the Group. The cost of an acquisition is measured as the fair
value of the assets given, equity instruments issued and liabilities incurred
or assumed at the date of exchange, plus costs directly attributable to the
acquisition. Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are measured initially at their
fair values at the acquisition date, irrespective of the extent of any
non-controlling interest. The excess of the cost of acquisition, excluding
directly attributable costs, over the fair value of the Group's share of the
identifiable net assets acquired is recorded as goodwill. If the cost of
acquisition is less than the fair value of the net assets of the subsidiary
acquired, the difference is recognised directly in the income statement.
The parent company's investments in subsidiaries are recorded at cost less,
where appropriate, provision for impairment. The fair value of the underlying
business of the Company's only material investment was significantly higher
than carrying value, and therefore no impairment was required.
Intercompany transactions, balances and unrealised gains and losses on
transactions between Group companies are eliminated.
Accounting policies of subsidiaries have been changed, where necessary, to
ensure consistency with the policies adopted by the Group.
Subsidiaries are de-consolidated from the date that control ceases.
Discontinued operations
Discontinued operations are a component of an entity that has been disposed of
and represents a major line of business and/or is part of a single
co-ordinated disposal plan.
1.5. Financial assets and financial liabilities accounting policy
Financial assets (with the exception of derivative financial instruments) accounting policy
The Group classifies its financial assets at inception into three measurement
categories; 'amortised cost', 'Fair Value Through Other Comprehensive Income'
('FVOCI') and 'Fair Value Through Profit or Loss' ('FVTPL'). A financial asset
is measured at amortised cost if both the following conditions are met and it
has not been designated as at FVTPL:
· the asset is held within a business model whose objective is to
hold the asset to collect its contractual cash flows; and
· the contractual terms of the financial asset give rise to cash
flows on specified dates that are Solely Payments of Principal and Interest
('SPPI').
The Group's current business model for all financial assets, with the
exception of derivative financial instruments, is to hold to collect
contractual cash flows, and all assets held give rise to cash flows on
specified dates that represent SPPI on the outstanding principal amount. All
of the Group's financial assets are therefore currently classified as
amortised cost, except for derivative financial instruments. Loans are
recognised when funds are advanced to customers and are carried at amortised
cost using the Effective Interest Rate ('EIR') method.
A debt instrument would be measured at FVOCI only if both the below conditions
are met and it has not been designated as FVTPL:
· the asset is held within a business model whose objective is
achieved by both collecting its contractual cash flows and selling the
financial asset; and
· the contractual terms of the financial asset give rise to cash
flows on specified dates that represent SPPI on the outstanding principal
amount.
The Group currently has no financial instruments classified as FVOCI.
See below for further details of the business model assessment and the SPPI
test.
On initial recognition of an equity investment that is not held for trading,
the Group may irrevocably elect to present subsequent changes in fair value in
other comprehensive income. This election would be made on an
investment-by-investment basis. The Group currently holds no such investments.
All other assets are classified as FVTPL.
Financial assets are not reclassified subsequent to their initial recognition,
except in the period after the Group changes its business model for managing
financial assets. The Group has not reclassified any financial assets during
the reporting period.
Assessment whether contractual cash flows are SPPI
For the purposes of this assessment, 'principal' is defined as the fair value
of the financial asset on initial recognition. 'Interest' is defined as
consideration for the cost of funds and for the credit risk associated with
the principal amount outstanding during a particular period of time and for
other basic lending risks and costs (e.g. administrative costs), as well as
profit margin.
In assessing whether the contractual cash flows are SPPI, the Group considers
the contractual terms of the instrument. This includes assessing whether the
financial asset contains a contractual term that could change the timing or
amount of contractual cash flows such that it would not meet the condition.
In making the assessment, the Group considers:
· Contingent events that would change the amount and timing of
cash flows;
· Prepayments and extension terms;
· Terms that limit the Group's claim to cash flows from specific
assets (e.g. non-recourse asset arrangements); and
· Features that modify consideration of the time value of money
(e.g. periodical reset of interest rate).
Business model assessment
The Group makes an assessment of the objective of a business model in which an
asset is held at a portfolio level because this best reflects the way the
business is managed and information is provided to management. The information
considered includes:
· The stated policies and objectives for the portfolio and the
operation of those policies in practice. In particular, whether management's
strategy focuses on managing the portfolio in order to collect contractual
cash flows or whether it is managed in order to trade to realise fair value
changes;
· How the performance of the portfolio is evaluated and reports
to management;
· The risks that affect the performance of the business model
(and the financial assets held within that business model) and how those risks
are managed; and
· The frequency, volume and timing of sales in prior periods, the
reasons for such sales and its expectations about future sales activity.
However, information about sales activity is not considered in isolation, but
as part of an overall assessment of how the Bank's stated objective for
managing the financial assets is achieved and how cash flows are realised.
Financial assets that are held for trading or managed and whose performance is
evaluated on a fair value basis are classified as FVTPL because they are
neither held to collect contractual cash flows nor held both to collect
contractual cash flows and to sell financial assets.
The Group currently has no financial instruments classified as FVTPL.
Amortised cost measurement
The amortised cost of a financial asset or financial liability is the amount
at which the financial asset or financial liability is measured at initial
recognition, plus or minus the cumulative amortisation using the EIR, which is
the rate that exactly discounts estimated future cash payments or receipts
through the expected life of the financial instrument, minus any reduction for
impairment.
Derecognition of financial assets
Financial assets are derecognised when the rights to receive cash flows from
the financial assets have expired or where the Group has transferred
substantially all of the risks and rewards of ownership or in the event of a
substantial modification. There have not been any instances where assets have
only been partially derecognised.
Modification of loans
A customer's account may be modified to assist customers, who are in or have
recently overcome financial difficulties, and have demonstrated both the
ability and willingness to meet the current or modified loan contractual
payments. Substantial loan modifications result in the derecognition of the
existing loan, and the recognition of a new loan at the new origination EIR
based on the expected future cash flows at origination. Determination of the
origination Probability of Default ('PD') for the new loan is required, based
on the PD as at the date of the modification, which is used for the
calculation of the impairment provision against the new loan. Any deferred
fees or deferred interest, and any difference between the carrying value of
the derecognised loan and the new loan, is written off to the income statement
on recognition of the new loan.
Where the modification is not considered to be substantial, neither the
origination EIR nor the origination probability of default for the modified
loan changes. The net present value of changes to the future contractual cash
flows adjusts the carrying amount of the original asset with the difference
immediately being recognised in profit or loss. The adjusted carrying amount
is then amortised over the remaining term of the modified loan using the
original EIR.
Financial liabilities (with the exception of derivative financial instruments)
The Group classifies its financial liabilities as measured at amortised cost.
Such financial liabilities are recognised when cash is received from
depositors and carried at amortised cost using the EIR method. Financial
liabilities are derecognised when they are extinguished (i.e. when the
obligation specified in the contract is discharged, cancelled or expires).
Offsetting of financial assets and financial liabilities
Financial assets and financial liabilities are not offset in the consolidated
financial statements unless the Group has both a legally enforceable right and
intention to offset.
1.6. Foreign currencies
Transactions in foreign currencies are initially recorded at the rates of
exchange prevailing on the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies are retranslated into the
Company's functional currency at the rates prevailing on the consolidated
statement of financial position date. Exchange differences arising on the
settlement of monetary items, and on the retranslation of monetary items, are
included in the income statement for the period.
2. Critical accounting judgements and key sources of estimation uncertainty
2.1. Judgements
Critical judgements are disclosed in
· Note 16.2.
· Note 31.1.2.
2.2. Key sources of estimation uncertainty
Estimations that could have a material impact on the Group's financial
results, and are therefore considered to be key sources of estimation
uncertainty. Key sources of estimation can be found in:
· Note 16.1. Allowances for impairment of loans and advances to
customers
· Note 29. Provisions for liabilities and charges
3. Operating segments
The Group is organised into four operating segments, which consist of the
different products available, as disclosed below.
Continuing operations
Consumer Finance
· Retail Finance: a market leading online e-commerce service to
retailers, providing unsecured lending products to prime UK customers to
facilitate the purchase of a wide range of consumer products, including
bicycles, musical instruments and equipment, furniture, outdoor/leisure,
electronics, dental, jewellery, home improvements and football season tickets.
· Vehicle Finance: hire purchase lending for used cars to prime
and near-prime customers and Personal Contract Purchase lending into the
consumer prime credit market, both secured against the vehicle financed. In
addition, a Stocking Funding product is also offered, whereby funds are
advanced and secured against dealer forecourt used car stock; sourced from
auctions, part exchanges or trade sources.
Business Finance
· Real Estate Finance: lending secured against property assets to
a maximum 70% loan-to-value ratio, on fixed or variable rates over a term of
up to five years.
· Commercial Finance: lending is predominantly against
receivables, typically releasing 90% of qualifying invoices under invoice
discounting facilities. Other assets can also be funded either long or
short-term and for a range of loan-to-value ratios alongside these services.
Additional lending to existing customers through the Government-guaranteed
Coronavirus Business Interruption Loan Scheme, Coronavirus Large Business
Interruption Loan Scheme and Recovery Loan Scheme is also provided.
Other
· This principally includes interest receivable from central
banks, interest receivable and payable on derivatives and interest payable on
deposits from customers, amounts due to banks and subordinated liabilities
which are not recharged to the operating segments.
The Group's chief operating decision-maker, the Group Chief Executive Officer,
regularly reviews these segments by looking at the operating income, size of
the loan books and impairments.
Interest expense is charged to the operating segments in accordance with the
Group's internal funds transfer pricing policy.
Operating expenses are not aligned to operating segments for the day-to-day
management of the business, so they cannot be allocated on a reliable basis.
Additionally, no balance sheet items are allocated to segments other than
loans and advances to customers.
Discontinued operations
Debt Management: a credit management services business that primarily invested
in purchased debt portfolios from third parties, as well as fellow group
undertakings. The Debt Management loan book was sold during 2022 and the
residual operations wound down.
Interest income and similar income Interest expense and similar charges Net interest income Net fee and commission income Operating income from external customers Net impairment charge on loans and advances to customers Loans and advances to customers
£million £million £million £million £million £million £million
31 December 2023
Retail Finance 106.5 (33.4) 73.1 3.2 76.3 15.9 1,223.2
Vehicle Finance 59.1 (15.0) 44.1 1.8 45.9 14.8 467.2
Consumer Finance 165.6 (48.4) 117.2 5.0 122.2 30.7 1,690.4
Real Estate Finance 74.4 (44.7) 29.7 0.9 30.6 4.5 1,243.8
Commercial Finance 27.2 (14.0) 13.2 11.3 24.5 8.0 381.1
Business Finance 101.6 (58.7) 42.9 12.2 55.1 12.5 1,624.9
Other 36.8 (29.4) 7.4 - 7.4 - -
304.0 (136.5) 167.5 17.2 184.7 43.2 3,315.3
Interest income and similar income Interest expense and similar charges Net interest income Net fee and commission income Operating income from external customers Net impairment charge on loans and advances to customers Loans and advances to
£million £million £million £million £million £million customers
£million
31 December 2022
Retail Finance 74.4 (13.2) 61.2 3.6 64.8 14.8 1,054.5
Vehicle Finance 46.6 (7.7) 38.9 1.4 40.3 21.3 373.1
Debt Management 5.3 (0.8) 4.5 4.1 8.6 0.8 -
Consumer Finance 126.3 (21.7) 104.6 9.1 113.7 36.9 1,427.6
Real Estate Finance 57.4 (27.7) 29.7 0.2 29.9 1.3 1,115.5
Commercial Finance 17.5 (6.1) 11.4 11.6 23.0 0.8 376.4
Business Finance 74.9 (33.8) 41.1 11.8 52.9 2.1 1,491.9
Other 7.1 4.3 11.4 0.2 11.6 - -
208.3 (51.2) 157.1 21.1 178.2 39.0 2,919.5
Of which:
Continuing 203.0 (50.4) 152.6 17.0 169.6 38.2 2,919.5
Discontinued (Note 10) 5.3 (0.8) 4.5 4.1 8.6 0.8 -
All of the Group's operations are conducted wholly within the United Kingdom
and geographical information is therefore not presented.
4. Operating income
All items below arise from financial instruments measured at amortised cost
unless otherwise stated.
4.1 Net interest income
2023 2022
£million £million
Loans and advances to customers 267.0 201.1
Cash and Bank of England reserve account 17.5 4.6
Debt securities - 0.1
284.5 205.8
Income on financial instruments hedging assets 19.5 2.5
Interest income and similar income 304.0 208.3
Of which:
Continuing 304.0 203.0
Discontinued (Note 10) - 5.3
Deposits from customers (88.2) (38.4)
Due to banks (18.7) (5.7)
Subordinated liabilities (10.7) (3.4)
Other (0.1) (0.1)
(117.7) (47.6)
Expense on financial instruments hedging liabilities (18.8) (3.6)
Interest expense and similar charges (136.5) (51.2)
Of which:
Continuing (136.5) (50.4)
Discontinued (Note 10) - (0.8)
Interest income and expense accounting policy
For all financial instruments measured at amortised cost, the EIR method is
used to measure the carrying value and allocate interest income or expense.
The EIR is the rate that exactly discounts estimated future cash payments or
receipts through the expected life of the financial instrument to:
· the gross carrying amount of the financial asset; or
· the amortised cost of the financial liability.
In calculating the EIR for financial instruments, other than assets that were
credit-impaired on initial recognition, the Group estimates cash flows
considering all contractual terms of the financial instrument (for example,
early redemption penalty charges and broker commissions) and anticipated
customer behaviour but does not consider future credit losses.
The calculation of the EIR includes all fees received and paid that are an
integral part of the loan, transaction costs and all other premiums or
discounts. Transaction costs include incremental costs that are directly
attributable to the acquisition or issue of a financial instrument.
For financial assets that are not considered to be credit-impaired ('Stage 1'
and 'Stage 2' assets), interest income is recognised by applying the EIR to
the gross carrying amount of the financial asset. For financial assets that
become credit-impaired subsequent to initial recognition ('Stage 3' assets),
from the next reporting period onwards interest income is recognised by
applying the EIR to the amortised cost of the financial asset. The credit risk
of financial assets that become credit-impaired are not expected to improve
such that they are no longer considered credit-impaired, however, if this were
to occur the calculation of interest income would revert back to the gross
basis. The Group's definition of Stage 1, Stage 2 and Stage 3 assets is set
out in Note 16.
For financial assets that were credit-impaired on initial recognition ('POCI'
assets), income is calculated by applying the credit adjusted EIR to the
amortised cost of the asset. Collection activity costs are not included in the
amortised cost of the assets, but are included in operating expenses in the
income statement, and are recognised as incurred, in common with other
businesses in the sector. For such financial assets the calculation of
interest income will never revert to a gross basis, even if the credit risk of
the asset improves.
Further details regarding when an asset becomes credit-impaired subsequent to
initial recognition is provided within Note 16.
4.2 Net fee and commission income
2023 2022
£million £million
Fee and disbursement income 16.4 19.8
Commission income 0.9 1.4
Other income - 0.3
Fee and commission income 17.3 21.5
Of which:
Continuing 17.3 17.4
Discontinued (Note 10) - 4.1
Other expenses (0.1) (0.4)
Fee and commission expense - Continuing (0.1) (0.4)
Fees and commission income is all recognised under IFRS 15 Revenue from
contracts to customers and consists principally of the following:
· Commercial Finance - discounting, service and arrangement fees.
· Retail Finance - principally comprises of account management
fees received from customers and referral fees received from third parties.
· Vehicle Finance - primarily relates to vehicle collection and
damage charges made to customers and loan administration fees charged to
dealers in respect of the Stock Funding product.
Fee and commission accounting policy
Fees and commission income that is not considered an integral part of the EIR
of a financial instrument are recognised under IFRS 15 when the Group
satisfies performance obligations by transferring promised services to
customers and presented in the income statement as fee and commission income.
All of the Group's fees and commissions relate to performance obligations that
are recognised at a point in time.
Fees and commission income and expenses that are an integral part of the EIR
of a financial instrument are included in the EIR and presented in the income
statement as interest income or expense.
No significant judgements are made in evaluating when a customer obtains
control of promised goods or services.
5. Fair value and other gains/(losses) on financial instruments
2023 2022
£million £million
Fair value movement during the year - Interest rate derivatives (6.1) 10.6
Fair value movement during the year - Hedged items 6.2 (10.9)
Hedge ineffectiveness recognised in the income statement 0.1 (0.3)
Losses recognised on derivatives not in hedge relationships (0.8) -
Extinguishment gain on redemption of subordinated debt 1.2 -
0.5 (0.3)
The extinguishment gain on redemption of subordinated debt relates to the
redemption during the year at a discount to par of the £50 million 6.75%
Fixed Rate Reset Callable Subordinated Notes due in 2028.
As a part of its risk management strategy, the Group uses derivatives to
economically hedge financial assets and liabilities. For further information
on the Group's risk management strategy for market risk see the Group's
Strategic Report.
Hedge accounting is employed by the Group to minimise the accounting
volatility associated with the change in fair value of derivative financial
instruments. This volatility does not reflect the economic reality of the
Group's hedging strategy, the Group only uses derivatives for the hedging of
risks.
5.1 Fair value gain/(loss) recognised in other comprehensive income
2023 2022
£million £million
Cash flow hedges
Fair value movement in year - Interest rate derivatives - (0.8)
Interest reclassified to the income statement during the year 0.6 0.1
Fair value gain/(loss) recognised in other comprehensive income 0.6 (0.7)
Although the Group uses interest rate derivatives exclusively to hedge
interest rate risk exposures, income statement volatility can still arise due
to hedge accounting ineffectiveness or because hedge accounting is not
achievable. Where such volatility arises it will net to zero over the life of
the hedging relationship. All derivatives held by the Group have been highly
effective in the year, resulting in minimal hedge accounting ineffectiveness
recognised in the income statement. Future ineffectiveness may arise as a
result of:
· differences between the expected and actual volume of
prepayments, as the Group hedges to the expected repayment date taking into
account expected prepayments based on past experience; or
· differences in the timing of cash flows for the hedged item and
the hedging instrument.
How fair value and cash flow hedge accounting affect the consolidated
financial statements and the main sources of the residual hedge
ineffectiveness remaining in the income statement are set out below. Further
information on the current derivative portfolio and the allocation to hedge
accounting types is included in Note 17.
Derivative financial instruments accounting policy
The Group enters into derivatives to manage exposures to fluctuations in
interest rates. Derivatives are not used for speculative purposes. Derivatives
are carried at fair value, with movements in fair value recognised in the
income statement or other comprehensive income. Derivatives are valued by
discounted cash flow models using yield curves based on Overnight Indexed Swap
('OIS') rates. All derivatives are carried as assets where fair value is
positive and as liabilities when fair value is negative. Derivatives are not
offset in the consolidated financial statements unless the Group has both a
legally enforceable right and intention to offset. The Group does not hold
contracts containing embedded derivatives.
Where cash collateral is received, to mitigate the risk inherent in the
amounts due to the Group, it is included as a liability within the due to
banks line within the statement of financial position. Where cash collateral
is given, to mitigate the risk inherent in amounts due from the Group, it is
included as an asset in the loans and advances to banks line within the
statement of financial position.
Hedge accounting
Following the implementation of IFRS 9, the Group elected to apply IAS 39 for
all of its hedge accounting requirements. When transactions meet specified
criteria the Group can apply two types of hedge accounting:
· Hedges of the fair value of recognised assets or liabilities or
firm commitments (fair value hedges).
· Hedges of highly probable future cash flows attributable to a
recognised asset or liability (cash flow hedges).
The Group does not have hedges of net investments.
At inception of a hedge, the Group formally documents the relationship between
the hedged items and hedging instruments, as well as its risk management
objective and strategy for undertaking various hedge transactions. The Group
also documents its assessment, both at hedge inception and on an ongoing
basis, of whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values of the hedged items
(i.e. the fair value offset between the hedged item and hedging instrument is
within the 80% -125% range).
When the European Union adopted IAS 39 in 2004, it removed certain hedge
accounting requirements, commonly referred
to as the EU carve-out. The relaxed requirements under the carve-out allow the
Group to apply the 'bottom up' method
when calculating macro-hedge ineffectiveness. This option is not allowed under
full IFRS. The Group has applied the EU
carve-out accordingly.
Fair value hedge accounting
Fair value hedge accounting results in the carrying value of the hedged item
being adjusted to reflect changes in fair value attributable to the hedged
risk, thereby offsetting the effect of the related movement in the fair value
of the derivative. Changes in the fair value of derivatives and hedged items
that are designated and qualify as fair value hedges are recorded in the
income statement.
In a one-to-one hedging relationship, in which a single derivative hedges a
single hedged item, the carrying value of the underlying asset or liability
(the hedged item) is adjusted for the hedged risk to offset the fair value
movement of the related derivative. In the case of a portfolio hedge, an
adjustment is included in the fair value adjustments for portfolio hedged risk
line in the statement of financial position to offset the fair value movements
in the related derivative. The Group currently only designates portfolio
hedges.
If the hedge no longer meets the criteria for hedge accounting, expires or is
terminated, the cumulative fair value adjustment to the carrying amount of a
hedged item is amortised to the income statement over the period to maturity
of the previously designated hedge relationship and recorded as net interest
income. If the underlying item is sold or repaid, the unamortised fair value
adjustment is immediately recognised in the income statement.
Cash flow hedge accounting
The effective portion of changes in the fair value of derivatives that are
designated and qualify as cash flow hedges are recognised in other
comprehensive income and presented in the cash flow hedge reserve in equity.
Any ineffective portion of changes in the fair value of the derivative is
recognised immediately in the income statement. Amounts recognised in the cash
flow hedge reserve are subsequently reclassified to the income statement when
the underlying asset or liability being hedged impacts the income statement,
for example, when interest payments are recognised, and are recorded in the
same income statement line in which the income or expense associated with the
related hedged item is reported.
When a hedging instrument expires or is sold, or when a hedge no longer meets
the criteria for hedge accounting, any cumulative gain or loss existing in
equity at that time remains in equity and is recognised in the periods when
the hedged item affects the income statement. When a forecast transaction is
no longer expected to occur (for example, the recognised hedged item is
disposed of), the cumulative gain or loss previously recognised in other
comprehensive income is immediately reclassified to the income statement.
The cash flow hedge reserve represents the cumulative amount of gains and
losses on hedging instruments deemed effective in cash flow hedges. The
cumulative deferred gain or loss on the hedging instrument is recognised in
profit or loss only when the hedged transaction impacts the profit or loss or
is included directly in the initial cost or other carrying amount of the
hedged non-financial items (basis adjustment).
6. Operating expenses
2023 2022
£million £million
Employee costs, including those of Directors:
Wages and salaries 49.5 47.9
Social security costs 5.6 5.7
Pension costs 1.8 2.1
Share-based payment transactions 1.1 1.8
Depreciation of property, plant and equipment (Note 19) 0.9 1.2
Depreciation of lease right-of-use assets (Note 20) 0.7 0.7
Amortisation of intangible assets (Note 21) 1.2 1.4
Operating lease rentals 0.7 0.7
Other administrative expenses 40.9 40.6
Total operating expenses 102.4 102.1
Of which:
Continuing 99.7 93.2
Discontinued (Note 10) 2.7 8.9
As described in Note 3, operating expenses are not aligned to operating
segments for the day-to-day management of the business, so they cannot be
allocated on a reliable basis.
Post-retirement obligations accounting policy
The Group contributes to defined contribution schemes for the benefit of
certain employees. The schemes are funded through payments to insurance
companies or trustee-administered funds at the contribution rates agreed with
individual employees. The Group has no further payment obligations once the
contributions have been paid. The contributions are recognised as an employee
benefit expense when they are due. There are no post-retirement benefits other
than pensions.
Remuneration of the Auditor and its associates, excluding VAT, was as follows:
2023 2022
£million £million
Fees payable to the Company's Auditor for the audit of the Company's annual 1.0 0.8
accounts
Fees payable to the Company's Auditor for other services:
Other assurance services 0.2 0.1
1.2 0.9
Other assurance services related to the Interim independent review report and
profit certification and a comfort letter in relation to the Tier 2 capital
issuance (2022: Interim independent review report and profit certification).
7. Average number of employees
2023 2022
Number Number
Directors 7 8
Other senior management 23 28
Other employees 849 904
879 940
8. Exceptional items
Borrowers in financial difficulty ('BiFD') Vehicle Finance collections review
Following the Financial Conduct Authority's review of BiFD across the
industry, and in response to the specific feedback we received on our own
collection activities, we have engaged external support to assist us and,
where necessary, are enhancing our approach, which includes offering a wider
range of forbearance options to our customers. We have incurred or provided
for costs of £4.7 million (comprising £2.7 million costs and £2.0 million
potential redress/goodwill) (2022: £nil) relating to processes, procedures
and policies in our Vehicle Finance collections operations. Costs associated
with these activities are outside the normal course of business and are
treated as exceptional. We expect the review to be completed in H2 2024.
Corporate activity
Corporate activities undertaken outside the normal course of business and
amounted to £1.8 million (2022: £nil).
Income tax on exceptional items
Income tax on exceptional items amount to £0.6 million credit (2022: £nil).
Exceptional items accounting policy
Exceptional items are expenses that do not relate to the Group's core
activities, which are material in the context of the Group's performance.
9. Income tax expense
2023 2022
£million £million
Current taxation
Corporation Tax charge - current year 8.0 8.4
Corporation Tax (credit)/charge - adjustments in respect of prior years (0.1) 0.1
7.9 8.5
Deferred taxation
Deferred tax charge - current year 1.3 1.9
Deferred tax credit - adjustments in respect of prior years (0.1) (0.1)
1.2 1.8
Income tax expense 9.1 10.3
Of which:
Continuing 9.7 9.4
Discontinued (Note 10) (0.6) 0.9
Tax reconciliation
Profit before tax 33.4 44.0
Tax at 23.50% (2022: 19.00%) 7.8 8.4
Permanent differences on exceptional items 0.9 -
Other permanent differences 0.3 0.4
Rate change on deferred tax assets 0.1 1.2
Other adjustments including prior year adjustments - 0.3
Income tax expense for the year 9.1 10.3
The Corporation Tax rate increased from 19% to 25%, with effect from 1 April
2023, giving a rate of 23.5% for the year to 31 December 2023. At the same
time, the banking surcharge reduced from 8% to 3% and the surcharge allowance
available to a banking group increased from £25 million to £100 million.
These changes were enacted prior to the start of 2023, and so opening and
closing 2023 deferred asset values have been calculated from expected future
tax relief based on these enacted rates. There was a deferred tax charge in
2022, arising from the changes to the banking surcharge enacted in 2022. The
main component of the deferred tax asset is deferred tax on the IFRS 9
transition adjustment, which reverses on a straight-line basis over 10 years
commencing in 2018.
Income tax accounting policy
Current income tax, which is payable on taxable profits, is recognised as an
expense in the period in which the profits arise.
Deferred tax is provided in full on temporary differences arising between the
tax bases of assets and liabilities and their carrying amounts in the
consolidated financial statements. Deferred tax is determined using tax rates
and laws that have been enacted or substantially enacted by the statement of
financial position date and are expected to apply when the related deferred
tax asset is realised or the deferred tax liability is settled.
10. Discontinued operations
The Group sold Debt Managers (Services) Limited's ('DMS') portfolio of loans
during 2022. As the Group has exited this market, the results of the Debt
Management business have presented as discontinued operations.
Income statement 2023 2022
£million
£million
Interest income and similar income - 5.3
Interest expense and similar charges - (0.8)
Net interest income - 4.5
Fee and commission income - 4.1
Net fee and commission income - 4.1
Operating income - 8.6
Net impairment charge on loans and advances to customers - (0.8)
Overall profit on disposal of loan portfolios (see below) - 6.1
Operating expenses (2.7) (8.9)
(Loss)/profit before income tax from discontinued operations (2.7) 5.0
Income tax credit/(charge) 0.6 (0.9)
(Loss)/profit for the year from discontinued operations (2.1) 4.1
Basic earnings per ordinary share - discontinued operations (11.2) 22.0
Diluted earnings per ordinary share - discontinued operations (10.9) 21.3
2023 operating expenses relate to the costs of winding down the business.
2022
£million
Consideration received 81.9
Carrying value of loan books disposed (71.8)
Selling costs (1.2)
Profit on disposal of loan book (including selling costs) 8.9
Other closure costs (2.8)
Overall profit on disposal of loan portfolio 6.1
Net cash flows 2023 2022
£million
£million
Operating (2.7) (82.6)
Investing - 81.9
Financing - (0.1)
Net cash outflow (2.7) (0.8)
11. Earnings per ordinary share
11.1 Basic
Basic earnings per ordinary share are calculated by dividing the profit
attributable to equity holders of the parent by the weighted average number of
ordinary shares as follows:
2023 2022
Profit attributable to equity holders of the parent (£million) 24.3 33.7
Weighted average number of ordinary shares (number) 18,751,059 18,672,650
Earnings per share (pence) 129.6 180.5
11.2 Diluted
Diluted earnings per ordinary share are calculated by dividing the profit
attributable to equity holders of the parent by the weighted average number of
ordinary shares in issue during the year, as noted above, as well as the
number of dilutive share options in issue during the year, as follows:
2023 2022
Weighted average number of ordinary shares 18,751,059 18,672,650
Number of dilutive shares in issue at the year-end 515,782 617,340
Fully diluted weighted average number of ordinary shares 19,266,841 19,289,990
Dilutive shares being based on:
Number of options outstanding at the year-end 1,210,544 1,206,639
Weighted average exercise price (pence) 225 304
Average share price during the year (pence) 719 1,040
Diluted earnings per share (pence) 126.1 174.7
12. Dividends
2023 2022
£million £million
2023 interim dividend - 16.0 pence per share (paid September 2023) 3.0 -
2022 final dividend - 29.1 pence per share (paid May 2023) 5.4 -
2022 interim dividend - 16.0 pence per share (paid September 2022) - 3.0
2021 final dividend - 41.1 pence per share (paid May 2022) - 7.7
8.4 10.7
The Directors recommend the payment of a final dividend of 16.2 pence per
share (2022: 29.1 pence per share). The final dividend, if approved by
members at the Annual General Meeting, will be paid on 23 May 2024, with an
associated record date of 26 April 2024.
Dividends accounting policy
Final dividends on ordinary shares are recognised in equity in the period in
which they are approved by shareholders. Interim dividends on ordinary shares
are recognised in equity in the period in which they are paid.
13. Loans and advances to banks
Moody's long-term ratings are as follows:
Group Group Company Company
2023
2022
2023
2022
£million £million £million £million
Aaa - Aa3 4.8 3.7 4.8 3.7
A1 48.9 41.6 48.2 40.0
Arbuthnot Latham & Co. Limited - Unrated - 5.2 - 5.2
53.7 50.5 53.0 48.9
None of the loans and advances to banks are either past due or impaired. Loans
and advances to banks includes £5.0 million (2022: £3.7 million), which the
Group and Company does not have access to, and are therefore excluded from
cash and cash equivalents. See Note 35.1 for a reconciliation to cash and cash
equivalents.
14. Loans and advances to customers
Group and Company
2023 2022
£million £million
Gross loans and advances 3,403.4 2,997.5
Less: allowances for impairment of loans and advances (Note 16) (88.1) (78.0)
3,315.3 2,919.5
The fair value of loans and advances to customers is shown in Note 41. Loans and advances to customers includes finance lease receivables of £450.3 million (2022: £371.2 million). See Note 15 for further details.
Retail Finance assets of £1,004.9 million (2022: £810.6 million) were
pre-positioned under the Bank of England's liquidity support operations and
Term Funding Scheme with additional incentives for SMEs and are available for
use as collateral within the schemes.
The Real Estate Finance loan book of £1,243.8 million (2022: £1,115.5
million) is secured upon real estate, which had a loan-to-value of 57% at 31
December 2023 (2022: 58%).
Under its credit policy, the Real Estate Finance business lends to a maximum
loan-to-value of:
· 70% for investment loans;
· 60% for residential development loans*;
· 65% for certain residential higher leveraged development
loans*, which is subject to an overall cap on such lending agreed by
management according to risk appetite; and
· 65% for commercial development loans*.
* based on gross development value.
All property valuations at loan inception, and the majority of development
stage valuations, are performed by independent Chartered Surveyors, who
perform their work in accordance with the Royal Institution of Chartered
Surveyors Valuation - Professional Standards.
£1.7 million of cash collateral has been received as at 31 December 2023 in
respect of certain loans and advances (2022: £6.8 million).
The accounting policy for loans and advances to customers is included in Note
1.5 Financial assets and financial liabilities accounting policy.
15. Finance lease receivables
Group and Company
Loans and advances to customers include finance lease receivables as follows:
2023 2022
£million £million
Gross investment in finance lease receivables:
- Not more than one year 186.2 157.6
- Later than one year and no later than five years 446.1 365.6
632.3 523.2
Unearned future finance income on finance leases (182.0) (152.0)
Net investment in finance leases 450.3 371.2
The net investment in finance leases may be analysed as follows:
- Not more than one year 113.3 93.7
- Later than one year and no later than five years 337.0 277.5
450.3 371.2
Finance lease receivables include Vehicle Finance loans to consumers.
Lessor accounting policy
The present value of the lease payments on assets leased to customers under
agreements that transfer substantially all the risks and rewards of ownership,
with or without ultimate legal title, are recognised as a receivable. The
difference between the gross receivable and the present value of the
receivable is recognised as unearned finance income. Lease income is
recognised over the term of the lease using the net investment method, which
reflects a constant periodic rate of return.
16. Allowances for impairment of loans and advances
Group and Company
Not credit-impaired Credit-impaired
Stage 1: Stage 2: Stage 3: Total provision Gross loans and advances to customers Provision coverage
Subject to
Subject to lifetime ECL
Subject to lifetime ECL
12-month ECL
£million £million %
£million £million
£million
31 December 2023
Consumer Finance:
Retail Finance 12.0 11.8 8.3 32.1 1,255.3 2.6%
Vehicle Finance:
Voluntary termination provision 6.7 - - 6.7
Other impairment 10.0 5.6 23.6 39.2
16.7 5.6 23.6 45.9 513.1 8.9%
Business Finance:
Real Estate Finance 0.3 0.7 7.0 8.0 1,251.8 0.6%
Commercial Finance 0.5 0.1 1.5 2.1 383.2 0.5%
29.5 18.2 40.4 88.1 3,403.4 2.6%
Not credit-impaired Credit-impaired
Stage 1: Stage 2: Stage 3: Total provision Gross loans and advances to customers Provision coverage
Subject to
Subject to
Subject to
12-month ECL
lifetime ECL
lifetime ECL £million £million %
£million £million £million
31 December 2022
Consumer Finance:
Retail Finance 12.7 9.8 5.7 28.2 1,082.7 2.6%
Vehicle Finance:
Voluntary termination provision 3.7 - - 3.7
Other impairment 7.3 16.4 17.0 40.7
11.0 16.4 17.0 44.4 417.5 10.6%
Business Finance:
Real Estate Finance 0.3 1.1 2.0 3.4 1,118.9 0.3%
Commercial Finance 0.3 1.3 0.4 2.0 378.4 0.5%
24.3 28.6 25.1 78.0 2,997.5 2.6%
The impairment charge disclosed in the income statement can be analysed as
follows:
2023 2022
£million £million
Expected credit losses: impairment charge 37.3 38.9
(Credit)/charge in respect of off balance sheet loan commitments (Note 29) (0.3) 0.2
Loans written off/(recovered) directly to the income statement¹ 6.2 (0.1)
43.2 39.0
Of which:
Continuing 43.2 38.2
Discontinued (Note 10) - 0.8
1. The impairment charge for 2023 includes a £7.2 million charge relating to
a single long-running debt case, of which £6.3 million was written off
directly to the income statement.
Total provisions above include expert credit judgements as follows:
2023 2022
£million £million
Specific overlays held against credit-impaired secured assets held within the (1.0) 0.7
Business Finance portfolio
Management judgement in respect of:
- Consumer Finance affordability - 2.5
- Vehicle Finance used car valuations - 1.3
- Vehicle Finance LGD on Stage 3 balances (2.1) -
Other 1.9 (1.6)
Expert credit judgements over the IFRS 9 model results (1.2) 2.9
The specific overlays for Business Finance have been estimated on an
individual basis by assessing the recoverability and condition of the secured
asset, along with any other recoveries that may be made.
For further details on Vehicle Finance used car valuations and Consumer
Finance affordability, see Notes 16.1.4 and 16.2.1, respectively.
Reconciliations of the opening to closing allowance for impairment of loans
and advances are presented below:
Not credit-impaired Credit-impaired
Stage 1: Stage 2: Stage 3: Total
Subject to
Subject to lifetime ECL
Subject to lifetime ECL
12-month ECL
£million
£million £million
£million
At 1 January 2023 24.3 28.6 25.1 78.0
(Decrease)/increase due to change in credit risk
- Transfer to Stage 2 (10.4) 56.1 - 45.7
- Transfer to Stage 3 (0.1) (30.6) 41.9 11.2
- Transfer to Stage 1 10.2 (35.3) - (25.1)
Passage of time (9.1) 3.5 3.7 (1.9)
New loans originated 20.5 - - 20.5
Matured and derecognised loans (2.3) (4.6) (4.7) (11.6)
Changes to credit risk parameters (5.3) 0.5 0.3 (4.5)
Other adjustments 3.0 - - 3.0
Charge/(credit) to income statement 6.5 (10.4) 41.2 37.3
Allowance utilised in respect of write-offs (1.3) - (25.9) (27.2)
31 December 2023 29.5 18.2 40.4 88.1
Group
Not credit-impaired Credit-impaired
Stage 1: Stage 2: Stage 3: Total
Subject to
Subject to
Subject to
12-month ECL
lifetime ECL
lifetime ECL £million
£million £million £million
At 1 January 2022 18.5 20.0 29.0 67.5
(Decrease)/increase due to change in credit risk
- Transfer to Stage 2 (8.8) 46.3 - 37.5
- Transfer to Stage 3 (0.4) (21.4) 29.5 7.7
- Transfer to Stage 1 2.3 (4.6) - (2.3)
Passage of time (6.3) (0.7) (2.5) (9.5)
New loans originated 23.2 - - 23.2
Matured and derecognised loans (2.9) (3.8) (5.2) (11.9)
Changes to credit risk parameters (2.9) (7.2) 1.9 (8.2)
Other adjustments 2.4 - - 2.4
Charge to income statement 6.6 8.6 23.7 38.9
Allowance utilised in respect of write-offs (0.8) - (27.6) (28.4)
31 December 2022 24.3 28.6 25.1 78.0
During the prior year, £8.1 million was utilised in respect of the DMS book
sale.
The tables above have been prepared based on monthly movements in the ECL.
Passage of time represents the impact of accounts maturing through their
contractual life, the associated reduction in PDs and the unwind of the
discount applied in calculating the ECL.
Changes to credit risk parameters represent movements that have occurred due
to the Group updating model inputs. This would include the impact of, for
example, updating the macroeconomic scenarios applied to the models.
Other adjustments represents the movement in the Vehicle Finance voluntary
termination provision.
Stage 1 write-offs arise on Vehicle Finance accounts where borrowers have
exercised their right to voluntarily terminate their agreements.
A breakdown of the gross receivable by internal credit risk rating is shown
below:
Group and Company
2023 2022
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
£million £million £million £million £million £million £million £million
Business Finance:
Strong 57.9 - - 57.9 127.5 - - 127.5
Good 1,087.8 4.5 - 1,092.3 962.4 28.5 - 990.9
Satisfactory 236.5 82.0 28.8 347.3 195.7 125.7 1.8 323.2
Weak - 59.3 78.2 137.5 - 40.2 15.5 55.7
1,382.2 145.8 107.0 1,635.0 1,285.6 194.4 17.3 1,497.3
Consumer Finance:
Good 706.0 58.9 10.1 775.0 601.5 77.6 6.0 685.1
Satisfactory 596.5 54.4 18.4 669.3 495.3 60.5 9.3 565.1
Weak 266.8 38.7 18.6 324.1 197.4 38.2 14.4 250.0
1,569.3 152.0 47.1 1,768.4 1,294.2 176.3 29.7 1,500.2
Internal credit risk rating is based on the most recent credit risk score of a
customer.
Company
All Company allowances for impairment of loans and advances are the same as
Group, except for the table below. For the Company disclosure, see the Group
tables above and Note 24.
Not credit-impaired Credit-impaired
Stage 1: Stage 2: Stage 3: Total
Subject to
Subject to
Subject to
12-month ECL
lifetime ECL
lifetime ECL £million
£million £million £million
At 1 January 2022 18.6 20.3 22.0 60.9
(Decrease)/increase due to change in credit risk
- Transfer to Stage 2 (8.8) 46.3 - 37.5
- Transfer to Stage 3 (0.4) (21.4) 29.5 7.7
- Transfer to Stage 1 2.3 (4.6) - (2.3)
Passage of time (6.4) (1.0) (1.8) (9.2)
New loans originated 23.2 - - 23.2
Matured and derecognised loans (2.9) (3.8) (5.2) (11.9)
Changes to credit risk parameters (2.9) (7.2) 1.0 (9.1)
Other adjustments 2.4 - (0.2) 2.2
Charge to income statement 6.5 8.3 23.3 38.1
Allowance utilised in respect of write-offs (0.8) - (20.2) (21.0)
31 December 2022 24.3 28.6 25.1 78.0
The tables above have been prepared based on monthly movements in the ECL.
Passage of time represent the impact of accounts maturing through their
contractual life, the associated reduction in PDs and the unwind of the
discount applied in calculating the ECL.
Changes to credit risk parameters represent movements that have occurred due
to the Group updating model inputs. This would include the impact of, for
example, updating the macroeconomic scenarios applied to the models.
Other adjustments represents the movement in the Vehicle Finance voluntary
termination provision.
Stage 1 write-offs arise on Vehicle Finance accounts that have exercised their
right to voluntarily terminate their agreements.
Impairment of financial assets and loan commitments accounting policy
The Group recognises loss allowances for Expected Credit Losses ('ECL') on all
financial assets carried at amortised cost, including lease receivables and
loan commitments. Credit loss allowances on Stage 1 assets are measured as an
amount equal to 12-month ECL and credit loss allowances on Stage 2 and Stage 3
assets are measured as an amount equal to lifetime ECL.
Stage 1 assets
Stage 1 assets comprise of the following:
· Financial assets determined to have low credit risk at the
reporting date.
· Financial assets that have not experienced a significant
increase in credit risk since their initial recognition.
· Financial assets that have experienced a significant increase
in credit risk since their initial recognition, but have subsequently met the
Group's cure policy, as set out below.
A low credit risk asset is considered to have low credit risk when its credit
risk rating is equivalent to the widely understood definition of 'investment
grade' assets. This is not applicable to loans and advances to customers, but
the Group has assessed all its debt securities, which represents UK Treasury
bills, to be low credit risk.
Stage 2 assets
Loans and advances to customers that have experienced a significant increase
in credit risk since their initial recognition and have not subsequently met
the Group's cure policy are classified as Stage 2 assets and are reclassified
from stage 1 to stage 2.
The Group's definitions of a significant increase in credit risk and default
are set out below.
For Consumer Finance, the credit risk of a financial asset is considered to
have experienced a significant increase in credit risk since initial
recognition where there has been a significant increase in the remaining
lifetime probability of default of the asset. The Group may also use its
expert credit judgement, and where possible, relevant historical and current
performance data, including bureau data, to determine that an exposure has
undergone a significant increase in credit risk.
For Business Finance, the credit risk of a financial asset is considered to
have experienced a significant increase in credit risk where certain early
warning indicators apply. These indicators may include notification of county
court judgements or, specifically for the Real Estate Finance portfolio, cost
over-runs and timing delays experienced by borrowers.
As a backstop, the Group considers that a significant increase in credit risk
occurs no later than when an asset is more than 30 days past due for all
portfolios.
Stage 3 assets
At each reporting date, the Group assesses whether financial assets carried at
amortised cost are credit-impaired or defaulted (Stage 3). A financial asset
is considered to be credit-impaired when an event or events that have a
detrimental impact on estimated future cash flows have occurred, or have other
specific unlikeliness to pay indicators. Evidence that a financial asset
is credit-impaired includes the following observable data:
· Initiation of bankruptcy proceedings.
· Notification of bereavement.
· Identification of loan meeting debt sale criteria.
· Initiation of repossession proceedings.
· A material covenant breach that has remained unremedied for
more than 90 days.
In addition, a loan that is 90 days or more past due is considered
credit-impaired for all portfolios. The credit risk of financial assets that
become credit-impaired are not expected to improve so they remain
credit-impaired.
For Commercial Finance facilities that do not have a fixed term or repayment
structure, evidence that a financial asset is
credit-impaired includes:
· the client ceasing to trade; or
· unpaid debtor balances that are dated at least six months past
their normal recourse period.
Cure policy
The credit risk of a financial asset may improve such that it is no longer
considered to have experienced a significant increase in credit risk if it
meets the Group's cure policy. The Group's cure policy for all portfolios
requires sufficient payments to be made to bring an account back within less
than 30 days past due and for such payments to be maintained for six
consecutive months in Vehicle Finance and three months in Retail Finance.
For Consumer Finance loans, the Group has determined Stage 3 to be an
absorbing state. Once a loan is in default it is not therefore expected to
cure back to Stage 1 or 2.
Calculation of expected credit loss ('ECL')
ECL are probability weighted estimates of credit losses that are measured as
the present value of all cash shortfalls. Specifically, this is the difference
between the contractual cash flows due and the cash flows expected to be
received, discounted at the original effective interest rate. For undrawn loan
commitments ECL is measured as the difference between the contractual cash
flows due if the commitment is drawn and the cash flows expected to be
received.
Lifetime ECL is the ECL that results from all possible default events over the
expected life of a financial asset.
12-month ECL is the portion of lifetime ECL that results from default events
on a financial asset that are possible within 12 months after the reporting
date.
ECL are calculated by multiplying three main components: the Probability of
Default ('PD'), Exposure At Default ('EAD') and Loss Given Default ('LGD')
discounted at the original effective interest rate of an asset. These
variables are derived from internally developed statistical models and
historical data, adjusted to reflect forward-looking information and are
discussed in turn further below. Management adjustments are made to modelled
output to account for situations, where known, or expected risk factors that
have not been reflected in the modelled outcome.
Probability of Default ('PD') and credit risk grades
Credit risk grades are a primary input into the determination of the PD for
exposures. The Group allocates each exposure to a credit risk grade at
origination and at each reporting period to predict the risk of default.
Credit risk grades are determined using qualitative and quantitative factors
that are indicative of the risk of default e.g. arrears status and loan
applications scores. These factors vary for each loan portfolio. Exposures are
subject to ongoing monitoring, which may result in an exposure being moved to
a different credit risk grade. In monitoring exposures information, such as
payment records, request for forbearance strategies and forecast changes in
economic conditions are considered for Consumer Finance. Additionally, for
Business Finance portfolios information obtained during periodic client
reviews, for example, audited financial statements, management accounts,
budgets and projections are considered, with particular focus on key ratios,
compliance with covenants and changes in senior management teams.
Emergence curves modelling is used in the production of forward-looking
lifetime PDs. This method defines the way that debt emerges for differing
quality accounts and their time on the books creating a clean relationship to
best demonstrate the movement in default rates as macroeconomic variables are
changed. These models are extrapolated to provide PD estimates for the future,
based on forecasted economic scenarios.
Exposure at Default ('EAD')
EAD represents the expected exposure in the event of a default. EAD is derived
from the current exposure and potential changes to the current amount allowed
under the terms of the contract, including amortisation overpayments and early
terminations. The EAD of a financial asset is its gross carrying amount. For
loan commitments the EAD includes the amount drawn, as well as potential
future amounts that may be drawn under the terms of the contract, estimated
based on historical observations and forward-looking forecasts.
For Commercial Finance facilities that have no specific term, an assumption is
made that accounts close 36 months after the reporting date for the purposes
of measuring lifetime ECL. This assumption is based on industry experience of
average client life. These facilities do not have a fixed term or repayment
structure, but are revolving and increase or decrease to reflect the value of
the collateral i.e. receivables or inventory. The Group can cancel the
facilities with immediate effect, although this contractual right is not
enforced in the normal day-to-day management of the facility. Typically,
demand would only be made on the failure of a client business or in the event
of a material event of default, such as a fraud. In the normal course of
events, the Group's exposure is recovered through receipt of remittances from
the client's debtors rather than from the client itself.
The ECL for such facilities is estimated taking into account the credit risk
management actions that the Group expects to take to mitigate against losses.
These include a reduction in advance rate and facility limits or application
of reserves against a facility to improve the likelihood of full recovery of
exposure from the debtors.
Alternative recovery routes mitigating ECL would include refinancing by
another funding provider, taking security over other asset classes or secured
personal guarantees from the client's principals.
Loss Given Default ('LGD')
LGD is the magnitude of the likely loss in the event of default. This takes
into account recoveries either through curing or, where applicable, through
the auction sale of repossessed collateral and debt sale of the residual
shortfall amount. For loans secured by real estate property, loan-to-value
ratios are key parameters in determining LGD. LGDs are calculated on a
discounted cash flow basis using the financial instrument's origination
effective interest rate as the discount factor.
Incorporation of forward-looking data
The Group incorporates forward-looking information into both its assessment of
whether the credit risk of a financial asset has increased significantly since
initial recognition and its measurement of ECL. This is achieved by developing
a number of potential economic scenarios and modelling ECLs for each scenario.
To ensure material non-linear relationships between economic factors and
credit losses are reflected in the calculation of ECL, a severe stress
scenario is used as one of these scenarios. The outputs from each scenario are
combined using the estimated likelihood of each scenario occurring to derive a
probability weighted expected credit loss. The four scenarios adopted and
probability weighting applied are set out below.
The Group considers that the key drivers of credit risk and credit losses
included in the macroeconomic scenarios are annual unemployment rate growth
and annual house price index growth. Base case assumptions applied for each of
these variables have been sourced from external consensus or Bank of England
forecasts. Further details of the assumptions applied to other scenarios are
presented below.
Expert credit judgements
The impairment charge comprises modelled ECLs and expert credit judgements.
Where the ECL modelled output does not reflect the level of credit risk,
judgement is used to calculate expert credit judgements, which are overlaid on
to the output from the models.
Presentation of loss allowance
Loss allowances for ECLs and expert credit judgements are presented in the
statement of financial position as follows with the loss recognised in the
income statement:
· Financial assets measured at amortised cost: as a deduction
from the gross carrying amount of the assets.
· Other loan commitments: generally, as a provision.
For the Real Estate Finance and Commercial Finance portfolios, where a loan
facility is agreed that includes both drawn and undrawn elements and the Group
cannot identify the ECL on the loan commitment separately, a combined loss
allowance for both drawn and undrawn components of the loan is presented as a
deduction from the gross carrying amount of the drawn component, with any
excess of the loss allowance over the gross drawn amount presented as a
provision.
When a loan is uncollectible, it is written off against the related ECL
allowance. Such loans are written off after all necessary procedures have been
completed and the amount of the loss has been determined.
Vehicle Finance voluntary termination provision
In addition to recognising allowances for ECLs, the Group holds a provision
for Voluntary Terminations ('VT') for all Vehicle Finance financial assets. VT
is a legal right provided to customers who take out hire purchase agreements.
The provision is calculated by multiplying the probability of VT of an asset
by the expected shortfall on VT discounted back at the original effective
interest rate of the asset. VT allowances are not held against loans in
default (Stage 3 loans).
The VT provision is presented in the statement of financial position as a
deduction from the gross carrying amount of Vehicle Finance assets with the
loss recognised in the income statement.
Write off
Loans and advances to customers are written off partially or in full when the
Group has exhausted all viable recovery options. The majority of write-offs
arise from Debt Relief Orders, insolvencies, Individual Voluntary
Arrangements, deceased customers where there is no estate and vulnerable
customers in certain circumstances. Amounts subsequently recovered on assets
previously written off are recognised in the impairment charge in the income
statement.
Intercompany receivables
The parent company's expected credit loss on amounts due from related
companies is calculated by applying probability of default and loss given
default to the amount outstanding at the year-end. See Note 24 for further
details.
16.1. Key sources of estimation uncertainty
Estimations that could have a material impact on the Group's financial results
and are therefore considered to be key sources of estimation uncertainty all
relate to the impairment charge on loans and advances to customers and are
therefore set out below. The potential impact of the current macroeconomic
environment has been considered in determining reasonably possible changes in
key sources of estimation uncertainty that may occur in the next 12 months.
The determination of both the PD and LGD require estimation, which is
discussed further below.
16.1.1. Incorporation of forward-looking data
The Group incorporates forward-looking information into both its assessment of
whether the credit risk of a financial asset has increased significantly since
initial recognition and its measurement of expected credit loss by developing
a number of potential economic scenarios and modelling expected credit losses
for each scenario. Further detail on this process is provided below. The
macroeconomic scenarios used were provided by external economic advisers. The
scenarios and weightings applied are summarised below:
December 2023 UK unemployment rate - Annual Average UK HPI - movement from December 2023
Scenario Weightings 2024 2025 2026 5 Yr Average 2024 2025 2026 5 Yr Average
% % % % % % % %
Upside 20% 4.2 3.9 3.8 3.9 (0.7) 2.4 9.4 3.7
Base 50% 4.5 4.4 4.1 4.1 (4.3) (3.3) 0.9 2.1
Downside 25% 5.4 6.5 7.1 6.5 (10.4) (13.8) (14.3) (0.9)
Severe 5% 5.7 7.0 7.6 7.0 (15.1) (21.8) (26.0) (3.5)
December 2022 UK unemployment rate - Annual Average UK HPI - movement from December 2022
Scenario Weightings 2023 2024 2025 5 Yr Average 2023 2024 2025 5 Yr Average
% % % % % % % %
Upside 20% 4.1 4.0 3.8 3.8 (5.2) (6.3) (2.0) 1.9
Base 50% 4.4 4.4 4.0 4.1 (8.4) (11.4) (9.2) 0.4
Downside 25% 5.4 6.5 7.1 6.5 (14.6) (21.3) (23.5) (2.6)
Severe 5% 5.6 7.0 7.6 6.9 (19.2) (28.8) (34.3) (5.2)
The sensitivity of the ECL allowance to reasonably possible changes in
scenario weighting (an increase in downside case weighting from the upside
case and an increase in severe stress case weighting from the base case) has
been assessed by the Group and computed as not material.
The Group recognised a total impairment charge of £43.2 million (2022: £39.0
million). Were each of the scenarios to be applied at 100%, rather than using
the weightings set out above, the increase/(decrease) in ECL provisions would
be as follows:
2023 2022
Scenario Vehicle Finance Retail Finance Business Finance Total Group Vehicle Finance Retail Finance Business Finance Total Group
£million £million £million £million £million £million £million £million
Upside (0.4) (1.2) (0.3) (1.9) (1.9) (0.3) (0.7) (2.9)
Base (0.2) (0.5) (0.2) (0.9) (1.5) 0.4 (0.4) (1.5)
Downside 0.5 1.5 0.4 2.4 0.9 3.0 0.9 4.8
Severe 0.6 2.2 1.1 3.9 1.6 3.8 1.7 7.1
16.1.2. ECL modelled output: Estimation of PDs
Sensitivity to reasonably possible changes in PD could potentially result in
material changes in the ECL allowance for Vehicle Finance and Retail Finance.
A 15% change in the PD for Vehicle Finance would immediately impact the ECL
allowance by £2.5 million (2022: a 15% change impacted the ECL allowance by
£3.1 million).
A 15% change in the PD for Retail Finance would immediately impact the ECL
allowance by £4.4 million (2022: a 15% change impacted the ECL allowance by
£2.5 million).
The above sensitivities reflect the levels of defaults observed during the
year.
Due to the relatively low levels of provisions on the Business Finance books,
sensitivity to reasonably possible changes in PD are not considered material.
16.1.3. ECL modelled output: Vehicle Finance recovery rates
With the exception of the Vehicle Finance portfolio, the sensitivity of the
ECL allowance to reasonably possible changes in the LGD is not considered
material. The Vehicle Finance portfolio is particularly sensitive to changes
in LGD due to the range of outcomes that could crystallise, depending on
whether the Group is able to recover the vehicle as security. For the Vehicle
Finance portfolio, a 20% (2022: 20%) change in the LGD is considered
reasonably possible due to delays in the vehicle collection process. A 20%
(2022: 20%) reduction in the vehicle recovery rate assumption element of the
LGD for Vehicle Finance would increase the ECL by £0.9 million (2022: £1.9
million). There has been no change in the vehicle recovery rate assumption in
the ECL model in either the current or prior year.
16.1.4. ECJ: Vehicle Finance used car values
At 31 December 2022, an overlay for lower recoveries impacted the ECL by £1.0
million. At 31 December 2023, observed used car values have now adjusted to
expected levels following an initial increase in used car prices since the
COVID-19 pandemic in March 2021. As a result, a sensitivity is no longer
applicable.
16.1.5. Climate-risk impact
The Group has considered the impact of climate-related risks on the
consolidated financial statements, in particular climate change negatively
impacting the value of the Group's Real Estate Finance business' security due
to the increased risk of flood associated with climate change.
While the effects of climate change represent a source of uncertainty (in
respect of potential transitional risks, such as those that may arise from
changes in future Government policy), the impact of all of the climate change
risks is considered to be low. Accordingly, the Group does not consider there
to be a material impact on its judgements and estimates from the physical,
transition and other climate-related risks in the short-term on the Real
Estate Finance loan book.
16.2. Critical judgments
16.2.1. ECJ: Consumer Finance customer affordability
At 31 December 2023, the ECL model now captures the impact of inflation on our
Consumer Businesses. The resulting expert credit judgement relating to
Consumer Finance affordability was released. As a result, at 31 December 2023
a sensitivity was no longer applicable.
The sensitivity of the ECL allowance to reasonably possible changes in
scenario weighting (an increase in downside case weighting from the upside
case and an increase in severe stress case weighting from the base case) has
been assessed by the Group and computed as not material.
The Group recognised a total impairment charge of £43.2 million (2022: £39.0
million). Were each of the scenarios to be applied at 100%, rather than using
the weightings set out above, the increase/(decrease) in ECL provisions would
be as follows:
2023 2022
Scenario Vehicle Finance Retail Finance Business Finance Total Group Vehicle Finance Retail Finance Business Finance Total Group
£million £million £million £million £million £million £million £million
Upside (0.4) (1.2) (0.3) (1.9) (1.9) (0.3) (0.7) (2.9)
Base (0.2) (0.5) (0.2) (0.9) (1.5) 0.4 (0.4) (1.5)
Downside 0.5 1.5 0.4 2.4 0.9 3.0 0.9 4.8
Severe 0.6 2.2 1.1 3.9 1.6 3.8 1.7 7.1
16.1.2. ECL modelled output: Estimation of PDs
Sensitivity to reasonably possible changes in PD could potentially result in
material changes in the ECL allowance for Vehicle Finance and Retail Finance.
A 15% change in the PD for Vehicle Finance would immediately impact the ECL
allowance by £2.5 million (2022: a 15% change impacted the ECL allowance by
£3.1 million).
A 15% change in the PD for Retail Finance would immediately impact the ECL
allowance by £4.4 million (2022: a 15% change impacted the ECL allowance by
£2.5 million).
The above sensitivities reflect the levels of defaults observed during the
year.
Due to the relatively low levels of provisions on the Business Finance books,
sensitivity to reasonably possible changes in PD are not considered material.
16.1.3. ECL modelled output: Vehicle Finance recovery rates
With the exception of the Vehicle Finance portfolio, the sensitivity of the
ECL allowance to reasonably possible changes in the LGD is not considered
material. The Vehicle Finance portfolio is particularly sensitive to changes
in LGD due to the range of outcomes that could crystallise, depending on
whether the Group is able to recover the vehicle as security. For the Vehicle
Finance portfolio, a 20% (2022: 20%) change in the LGD is considered
reasonably possible due to delays in the vehicle collection process. A 20%
(2022: 20%) reduction in the vehicle recovery rate assumption element of the
LGD for Vehicle Finance would increase the ECL by £0.9 million (2022: £1.9
million). There has been no change in the vehicle recovery rate assumption in
the ECL model in either the current or prior year.
16.1.4. ECJ: Vehicle Finance used car values
At 31 December 2022, an overlay for lower recoveries impacted the ECL by £1.0
million. At 31 December 2023, observed used car values have now adjusted to
expected levels following an initial increase in used car prices since the
COVID-19 pandemic in March 2021. As a result, a sensitivity is no longer
applicable.
16.1.5. Climate-risk impact
The Group has considered the impact of climate-related risks on the
consolidated financial statements, in particular climate change negatively
impacting the value of the Group's Real Estate Finance business' security due
to the increased risk of flood associated with climate change.
While the effects of climate change represent a source of uncertainty (in
respect of potential transitional risks, such as those that may arise from
changes in future Government policy), the impact of all of the climate change
risks is considered to be low. Accordingly, the Group does not consider there
to be a material impact on its judgements and estimates from the physical,
transition and other climate-related risks in the short-term on the Real
Estate Finance loan book.
16.2. Critical judgments
16.2.1. ECJ: Consumer Finance customer affordability
At 31 December 2023, the ECL model now captures the impact of inflation on our
Consumer Businesses. The resulting expert credit judgement relating to
Consumer Finance affordability was released. As a result, at 31 December 2023
a sensitivity was no longer applicable.
17. Derivative financial instruments
Group and Company
Interest rate derivatives are held for risk mitigation purposes. The table
below provides an analysis of the notional amount and fair value of
derivatives by hedge accounting relationship. The amount of ineffectiveness
recognised for each hedge type is shown in Note 5. Notional amount is the
amount on which payment flows are derived and does not represent amounts at
risk.
Notional Assets Liabilities Notional Assets Liabilities
2023 2023 2023 2022 2022 2022
£million £million £million £million £million £million
Interest rate derivatives designated in fair value hedges
In less than one year 783.7 6.9 (3.0) 689.8 3.9 (6.0)
More than one year but less than three years 859.4 13.2 (9.0) 718.5 15.4 (16.1)
More than three years but less than five years 494.0 5.3 (9.3) 274.9 15.5 (3.3)
More than five years - - - 7.5 - -
2,137.1 25.4 (21.3) 1,690.7 34.8 (25.4)
Interest rate derivatives designated in cash flow hedges
In less than one year 4.7 - (0.2) - - -
More than one year but less than three years 9.4 - (0.4) 14.1 - (1.1)
More than three years but less than five years 2.4 0.1 - 2.4 0.1 -
16.5 0.1 (0.6) 16.5 0.1 (1.1)
Foreign exchange derivatives
In less than one year 28.0 - (0.1) 16.7 - (0.2)
2,181.6 25.5 (22.0) 1,723.9 34.9 (26.7)
In order to manage interest rate risk arising from fixed rate financial
instruments, the Group monitors its interest rate mismatch regularly
throughout each month, seeking to 'match' assets and liabilities in the first
instance and hedging residual risk using interest rate derivatives to maintain
adherence to risk appetites. Some residual risk remains due to timing
differences. The exposure from the portfolio frequently changes due to the
origination of new instruments, contractual repayments and early prepayments
made in each period. As a result, the Group adopts a dynamic hedging strategy
(sometimes referred to as 'macro' or 'portfolio' hedge) to hedge its exposure
profile by closing and entering into new interest rate derivative agreements.
The Group establishes the hedging ratio by matching the derivatives with the
principal of the portfolio being hedged.
The following table sets out details of the hedged exposures covered by the
Group's hedging strategies:
Carry amount of Accumulated amount Carry amount of Accumulated amount
hedged item
of fair value adjustments
hedged item
of fair value adjustments
in the hedged items
in the hedged items
Asset/(liability)
Asset/(liability)
(Liability)/asset
(Liability)/asset
2023
2022
2023
2022
£million
£million
£million £million
ASSETS
Interest rate fair value hedges
Loans and advances to customers
Fixed rate Real Estate Finance loans 565.5 (3.5) 430.7 (22.3)
Fixed rate Vehicle Finance loans 130.5 (0.3) 110.5 (4.0)
Fixed rate Retail Finance loans 393.0 (0.1) 249.2 (5.7)
1,089.0 (3.9) 790.4 (32.0)
Interest rate cash flow hedges
Cash and Bank of England reserve account
Bank of England reserve 16.5 N/A 16.5 N/A
1,105.5 (3.9) 806.9 (32.0)
LIABILITIES
Interest rate fair value hedges
Deposits from customers
Fixed rate customer deposits (957.6) 3.6 (900.3) 23.0
Subordinated liabilities
Fixed rate Tier 2 regulatory capital (90.0) (2.2) - -
(1,047.6) 1.4 (900.3) 23.0
The accumulated amount of fair value hedge adjustments remaining in the
statement of financial position for hedged items that have ceased to be
adjusted for hedging gains and losses is £nil (2022: £0.2 million).
The following table shows the impact of financial assets and financial
liabilities relating to transactions where:
· there is an enforceable master netting agreement in place, but
the offset criteria are not otherwise satisfied, and
· financial collateral is paid and received.
Gross amount reported on balance sheet Master Financial collateral Net amounts after
netting arrangements £million
offsetting
£million £million
£million
31 December 2023
Derivative financial assets
Interest rate derivatives 25.5 (21.9) (3.5) 0.1
25.5 (21.9) (3.5) 0.1
Derivative financial liabilities
Interest rate derivatives (21.9) 21.9 - -
Foreign exchange derivatives (0.1) - 0.2 0.1
(22.0) 21.9 0.2 0.1
Gross amount reported on balance sheet Master Financial Net amounts
netting arrangements
collateral
after offsetting
£million
£million £million £million
31 December 2022
Derivative financial assets
Interest rate derivatives 34.9 (26.5) (7.7) 0.7
34.9 (26.5) (7.7) 0.7
Derivative financial liabilities
Interest rate derivatives (26.5) 26.5 - -
Foreign exchange derivatives (0.2) - - (0.2)
(26.7) 26.5 - (0.2)
Master netting arrangements do not meet the criteria for offsetting in the
statement of financial position. This is because the arrangement creates an
agreement for a right of set-off of recognised amounts, which is enforceable
only following an event of default, insolvency or bankruptcy of the Group or
counterparties. Furthermore, the Group and its counterparties do not intend to
settle on a net basis or realise the assets and settle the liabilities
simultaneously.
Financial collateral consists of cash settled, typically daily or weekly, to
mitigate the credit risk on the fair value of derivatives.
18. Investment property
Group Company
£million £million
1 January 2022 4.7 5.7
Disposal (3.3) (3.3)
Transfer to property, plant and equipment (1.4) (1.4)
At 31 December 2022 - 1.0
Revaluation - (0.1)
At 31 December 2023 - 0.9
The Company's investment property comprises 25 and 26 Neptune Court, Vanguard
Way, Cardiff CF24 5PJ, which is occupied by one of the Company's subsidiaries.
The transfer to Property, plant and equipment during 2022 related to a
property that was previously let to a third party, which became vacant and was
subsequently occupied by the Company.
The Company's investment property was stated at fair value as at 31 December
2023. The Directors have assessed the value of the investment property at the
year-end through comparison to current rental yields on similar properties in
the same area. This has resulted in a reduction in the carrying amount of
£0.1 million since 31 December 2022. Movements in the fair value of
investment property are recognised as operating expenses in the income
statement.
Investment property accounting policy
Investment property, which is property held to earn rentals and for capital
appreciation, is measured initially at cost, including transaction costs.
Subsequent to initial recognition, investment property is measured at fair
value. External valuations are performed on a triennial basis. Gains or losses
arising from changes in the fair value of investment property are included in
the income statement in the period in which they arise.
An investment property is derecognised upon disposal or when the investment
property is permanently withdrawn from use and no future economic benefits are
expected from the disposal. Any gain or loss arising on derecognition of the
property (calculated as the difference between the net disposal proceeds and
the carrying amount of the asset) is included in the income statement in the
period in which the property is derecognised.
19. Property, plant and equipment
Group
Freehold land Leasehold Computer Total
and buildings
and other equipment
£million
£million property
£million
£million
Cost or valuation
At 1 January 2022 6.9 0.1 9.3 16.3
Land and buildings prior year restatement 1.8 - - 1.8
(see Note 1.3)
At 1 January 2022 (as restated) 8.7 0.1 9.3 18.1
Additions - - 1.0 1.0
Disposals - (0.1) (3.4) (3.5)
Transfer from investment properties 1.4 - - 1.4
At 31 December 2022 10.1 - 6.9 17.0
Additions - - 2.2 2.2
Disposals - - (1.4) (1.4)
At 31 December 2023 10.1 - 7.7 17.8
Accumulated depreciation
At 1 January 2022 - - (7.0) (7.0)
Land and buildings prior year restatement (2.3) - - (2.3)
(see Note 1.3)
At 1 January 2022 (as restated) (2.3) - (7.0) (9.3)
Depreciation charge (0.1) - (1.1) (1.2)
Disposals - - 3.2 3.2
At 31 December 2022 (2.4) - (4.9) (7.3)
Depreciation charge (0.1) - (0.8) (0.9)
Disposals - - 1.2 1.2
At 31 December 2023 (2.5) - (4.5) (7.0)
Net book amount
At 31 December 2022 7.7 - 2.0 9.7
At 31 December 2023 7.6 - 3.2 10.8
The Group's freehold properties, which are occupied by the Group, comprise:
· the Registered Office of the Company;
· One Arleston Way, Solihull, B90 4LH; and
· 25 and 26 Neptune Court, Vanguard Way, Cardiff CF24 5PJ.
Company
Freehold Computer Total
property
and other equipment
£million
£million
£million
Cost or valuation
At 1 January 2022 2.1 6.4 8.5
Land and buildings prior year restatement 0.3 - 0.3
(see Note 1.3)
At 1 January 2022 (as restated) 2.4 6.4 8.8
Additions - 0.3 0.3
Disposals - (0.5) (0.5)
Transfer from investment properties 1.4 - 1.4
At 31 December 2022 3.8 6.2 10.0
Additions - 2.1 2.1
Disposals - (1.2) (1.2)
At 31 December 2023 3.8 7.1 10.9
Accumulated depreciation
At 1 January 2022 - (4.8) (4.8)
Land and buildings prior year restatement (0.1) - (0.1)
(see Note 1.3)
At 1 January 2022 (as restated) (0.1) (4.8) (4.9)
Depreciation charge - (0.7) (0.7)
Disposals - 0.5 0.5
At 31 December 2022 (0.1) (5.0) (5.1)
Depreciation charge (0.1) (0.5) (0.6)
Disposals - 1.1 1.1
At 31 December 2023 (0.2) (4.4) (4.6)
Net book amount
At 31 December 2022 3.7 1.2 4.9
At 31 December 2023 3.6 2.7 6.3
The Company's freehold property comprises the Registered Office of the
Company.
During the year, the accounting policy has been changed from carrying freehold
properties at fair value to historic cost. Further details are given in Note
1.3.
The carrying value of freehold land, which is included in the total carrying
value of freehold land and buildings, and which is not depreciated at 31
December 2023 and 31 December 2022 was £1.5 million for the Group and £0.8
million for the Company.
Property, plant and equipment accounting policy
Property, plant and equipment is stated at historical cost less any
accumulated depreciation and any accumulated impairment losses. Historical
cost includes expenditure that is directly attributable to the acquisition of
the items. Pre-installed computer software licences are capitalised as part of
the computer hardware it is installed on. Depreciation is calculated using the
straight-line method to allocate their cost to their residual values over
their estimated useful lives, which are subject to regular review:
Land Not depreciated
Freehold buildings 50 years
Leasehold improvements Shorter of life of lease or seven years
Computer equipment Three to five years
Other equipment Five to ten years
The above useful economic lives have not changed since the prior year.
Gains and losses on disposals are determined by comparing proceeds with
carrying amounts. These are included in the income statement.
The Group applies IAS 36 to determine whether property, plant and equipment is
impaired.
20. Right-of-use assets
Group Company
Leasehold Leased motor vehicles Total Leasehold Leased motor vehicles Total
property
property
£million £million
£million £million
£million £million
Cost
At 1 January 2022 4.4 0.3 4.7 3.1 0.2 3.3
Additions - 0.5 0.5 - 0.2 0.2
Disposals (1.3) (0.2) (1.5) - (0.2) (0.2)
At 31 December 2022 3.1 0.6 3.7 3.1 0.2 3.3
Additions 0.8 0.2 1.0 0.8 0.1 0.9
At 31 December 2023 3.9 0.8 4.7 3.9 0.3 4.2
Accumulated depreciation
At 1 January 2022 (2.2) (0.3) (2.5) (1.6) (0.2) (1.8)
Depreciation charge (0.6) (0.1) (0.7) (0.4) - (0.4)
Disposals 0.8 0.2 1.0 - 0.2 0.2
At 31 December 2022 (2.0) (0.2) (2.2) (2.0) - (2.0)
Depreciation charge (0.5) (0.2) (0.7) (0.5) (0.1) (0.6)
At 31 December 2023 (2.5) (0.4) (2.9) (2.5) (0.1) (2.6)
Net book amount
At 31 December 2022 1.1 0.4 1.5 1.1 0.2 1.3
At 31 December 2023 1.4 0.4 1.8 1.4 0.2 1.6
Lessee accounting policy
The Group assesses whether a contract is or contains a lease at inception of
the contract. The Group recognises a right-of-use asset and a corresponding
lease liability with respect to all lease arrangements in which it is the
lessee, except for short-term leases (defined as leases with a lease term of
12 months or less) and leases of low value assets. For these leases, the Group
recognises the lease payments as an operating expense on a straight-line basis
over the term of the lease unless another systematic basis is more
representative of the time pattern in which economic benefits from the leased
assets are consumed.
The lease liability is initially measured at the present value of the future
lease payments, discounted by using the rate implicit in the lease. If this
rate cannot be readily determined, the Group uses its incremental borrowing
rate. It is subsequently measured by increasing the carrying amount to reflect
interest on the lease liability (using the effective interest rate method) and
by reducing the carrying amount to reflect the lease payments made, and is
presented as a separate line in the consolidated statement of financial
position.
The right-of-use assets comprise the initial measurement of the corresponding
lease liability, lease payments made at or before the commencement day, less
any lease incentives received and any initial direct costs. They are
subsequently measured at cost less accumulated depreciation and impairment
charges and are depreciated over the shorter of the lease term and useful life
of the underlying asset. The depreciation starts at the commencement date of
the lease. The right-of-use assets are presented as a separate line in the
consolidated statement of financial position. The Group applies IAS 36 to
determine whether a right-of-use asset is impaired and accounts for any
identified impairment loss as described in the 'Property, plant and equipment'
policy.
Rentals made under operating leases for less than 12 months in duration, and
operating leases on low value items, are recognised in the income statement on
a straight-line basis over the term of the lease.
21. Intangible assets
Group
Goodwill Computer software Other Total
£million
£million
intangible
£million
assets
£million
Cost or valuation
At 1 January 2022 1.0 17.3 2.2 20.5
Additions - 1.7 - 1.7
Disposals - (1.8) - (1.8)
At 31 December 2022 1.0 17.2 2.2 20.4
Additions - 0.5 - 0.5
At 31 December 2023 1.0 17.7 2.2 20.9
Accumulated amortisation
At 1 January 2022 - (11.6) (2.0) (13.6)
Amortisation charge - (1.2) (0.2) (1.4)
Disposals - 1.2 - 1.2
At 31 December 2022 - (11.6) (2.2) (13.8)
Amortisation charge - (1.2) - (1.2)
At 31 December 2023 - (12.8) (2.2) (15.0)
Net book amount
At 31 December 2022 1.0 5.6 - 6.6
At 31 December 2023 1.0 4.9 - 5.9
Goodwill above relates to the V12 cash generating unit, which is part of the
Retail Finance operating segment.
The recoverable amount of these cash generating units are determined on a
value in use calculation, which uses cash flow projections based on financial
forecasts covering a three-year period, and a discount rate of 8% (2022: 8%).
Cash flow projections during the forecast period are based on the expected
rate of new business. A zero growth based scenario is also considered. The
Directors believe that any reasonably possible change in the key assumptions
on which recoverable amount is based would not cause the aggregate carrying
amount to exceed the aggregate recoverable amount of the cash generating unit.
Hence no impairment has been recognised.
Other intangible assets were recognised as part of the V12 Finance Group
acquisition, which are now fully amortised.
Company
Goodwill Computer software Total
£million £million £million
Cost or valuation
At 1 January 2022 0.3 12.4 12.7
Additions - 0.1 0.1
At 31 December 2022 0.3 12.5 12.8
Additions - 0.1 0.1
At 31 December 2023 0.3 12.6 12.9
Accumulated amortisation
At 1 January 2022 - (7.3) (7.3)
Amortisation charge - (1.1) (1.1)
At 31 December 2022 - (8.4) (8.4)
Amortisation charge - (1.0) (1.0)
At 31 December 2023 - (9.4) (9.4)
Net book amount
At 31 December 2022 0.3 4.1 4.4
At 31 December 2023 0.3 3.2 3.5
Goodwill above relates to the Retail Finance operating segment. The
recoverable amount is determined on the same basis as for the Group.
Intangible assets accounting policy
(a) Goodwill
Goodwill represents the excess of the cost of the acquisition over the fair
value of the Group's share of the net identifiable assets acquired at the date
of acquisition. Goodwill is held at cost less accumulated impairment charge
and is deemed to have an infinite life.
The Group reviews the goodwill for impairment at least annually or when events
or changes in economic circumstances indicate that impairment may have taken
place. An impairment charge is recognised in the income statement if the
carrying amount exceeds the recoverable amounts.
(b) Computer software
Acquired computer software licences are capitalised on the basis of the costs
incurred to acquire and bring to use the specific software.
Costs associated with developing or maintaining computer software programmes
are recognised as an expense as incurred unless the technical feasibility of
the development has been demonstrated, and it is probable that the expenditure
will enable the asset to generate future economic benefits in excess of its
originally assessed standard of performance, in which case they are
capitalised.
These costs are amortised on a straight-line basis over their expected useful
lives, which are between three to 10 years.
(c) Other intangibles
The acquisition of subsidiaries has been accounted for in accordance with IFRS
3 'Business Combinations', which requires the recognition of the identifiable
assets acquired and liabilities assumed at their acquisition date fair values.
As part of this process,
it was necessary to recognise certain intangible assets that are separately
identifiable and are not included on the acquiree's balance sheet, which are
amortised over their expected useful lives, as set out above.
The Group applies IAS 36 to determine whether an intangible asset is impaired.
22. Investments in group undertakings
Company
Cost and net book value 2023 2022
£million
£million
At 1 January 5.7 4.3
Addition - Investment in AppToPay Ltd - 1.0
Equity contributions to subsidiaries in respect of share options 0.2 0.4
At 31 December 5.9 5.7
During the prior year, the Group completed the acquisition of 100% of the
issued share capital of AppToPay Ltd for £1.0 million. AppToPay Ltd was the
owner of a proprietary technology platform.
The Group elected to use the optional practical expedient within IFRS 3
Business Combinations, which allows a simplified assessment that a purchase is
accounted for as an asset purchase as opposed to a business combination if
substantially all the fair value of the gross assets acquired is concentrated
in a single identifiable asset. AppToPay Ltd's principal asset was a software
development intangible asset. Since acquisition, the assets and liabilities
have been transferred across to V12 Retail Finance Limited.
Shares in subsidiary undertakings of Secure Trust Bank PLC are stated at cost
less any provision for impairment. All subsidiary undertakings are unlisted
and none are banking institutions. The share capital of the subsidiary
undertakings comprises solely of ordinary shares and all are 100% owned by the
Company. The subsidiary undertakings were all incorporated in the UK and
wholly owned via ordinary shares. All subsidiary undertakings are included in
the consolidated financial statements and have an accounting reference date of
31 December.
Details are as follows:
Company number Principal activity
Owned directly
AppToPay Ltd 11204449 Non-trading
Debt Managers (Services) Limited 08092808 Debt management
Secure Homes Services Limited 01404439 Property rental
STB Leasing Limited 01648384 Non-trading
V12 Finance Group Limited 07498951 Holding company
Owned indirectly via an intermediate holding company
V12 Personal Finance Limited 05418233 Dormant
V12 Retail Finance Limited 04585692 Sourcing and servicing of unsecured loans
The registered office of the Company, and all subsidiary undertakings, is
Yorke House, Arleston Way, Solihull, B90 4LH.
AppToPay Ltd, Debt Managers (Services) Limited, Secure Homes Services Limited,
STB Leasing Limited, V12 Finance Group Limited and V12 Personal Finance
Limited are exempt from the requirements of the Companies Act 2006 relating to
the audit of individual accounts by virtue of s479A, and the Company has given
guarantees accordingly under s479C in respect of the year ended 31 December
2023.
23. Deferred taxation
Group Group Company Company
2023 2022 2023 2022
£million £million £million £million
Deferred tax assets:
Other short-term timing differences 4.3 5.6 4.3 5.3
At 31 December 4.3 5.6 4.3 5.3
Deferred tax assets:
At 1 January 5.6 6.9 5.3 6.8
Land and buildings prior year restatement - 0.3 - 0.1
(see Note 1.3)
At 1 January (as restated) 5.6 7.2 5.3 6.9
Income statement (1.2) (1.8) (0.9) (1.8)
Other comprehensive income (0.1) 0.2 (0.1) 0.2
At 31 December 4.3 5.6 4.3 5.3
Deferred tax accounting policy
Deferred tax assets and liabilities are offset if there is a legally
enforceable right to offset current tax assets and liabilities, and they
relate to taxes levied by the same tax authority on the same taxable entity,
or on different tax entities, when they intend to settle current tax
liabilities and assets on a net basis or their tax assets and liabilities will
be realised simultaneously.
Deferred tax assets are recognised where it is probable that future taxable
profits will be available against which the temporary differences can be
utilised.
24. Other assets
Group Group Company Company
2023
2023
2022
2022
£million
£million £million
£million
Gross amounts due from related companies - - 4.8 3.1
less: allowances for impairment of amounts due from related companies - - (2.1) -
Amounts due from related companies - - 2.7 3.1
Other receivables 2.4 1.7 2.3 1.5
Cloud software development prepayment 4.4 4.7 4.4 4.7
Other prepayments and accrued income 6.1 7.0 5.0 5.8
12.9 13.4 14.4 15.1
Cloud software development costs, principally relating to the Group's Motor
Transformation Programme, do not meet the intangible asset recognition
criteria and are therefore classified as a prepayment, which is expensed to
the income statement over the useful economic life of the software.
25. Due to banks
Group and Company
Group Group
2023
2022
£million £million
Amounts due under the Bank of England's liquidity support operations (Term 390.0 390.0
Funding Scheme with additional incentives for SMEs ('TFSME'))
Amounts due to other credit institutions 6.8 7.7
Accrued interest 5.2 2.8
402.0 400.5
Amounts due under TFSME bear interest at the Bank of England base rate and are
due for repayment during 2025.
The accounting policy for amounts due to banks is included in Note 1.5
Financial assets and financial liabilities accounting policy.
26. Deposits from customers
Group and Company
2023 2022
£million £million
Access accounts 521.3 178.1
Fixed term bonds 1,546.6 1,414.0
Notice accounts 174.3 500.7
ISAs 629.6 421.8
2,871.8 2,514.6
The accounting policy for deposits from customers is included in Note 1.5
Financial assets and financial liabilities accounting policy.
27. Lease liabilities
Group Group Company Company
2023 2022 2023 2022
£million £million £million £million
At 1 January 2.1 3.1 1.9 2.3
New leases 1.0 0.5 0.9 0.2
Lease termination - (0.6) - -
Payments (0.9) (1.0) (0.8) (0.7)
Interest expense 0.1 0.1 0.1 0.1
At 31 December 2.3 2.1 2.1 1.9
Lease liabilities - Gross
- No later than one year 0.9 0.7 0.9 0.7
- Later than one year and no later than five years 1.5 1.5 1.3 1.3
2.4 2.2 2.2 2.0
Less: Future finance expense (0.1) (0.1) (0.1) (0.1)
Lease liabilities - Net 2.3 2.1 2.1 1.9
Lease liabilities - Gross
- No later than one year 0.9 0.7 0.9 0.7
- Later than one year and no later than five years 1.4 1.4 1.2 1.2
2.3 2.1 2.1 1.9
The accounting policy for lease liabilities is included in Note 20 Lessee
accounting policy.
28. Other liabilities
Group Group Company Company
2023
2022
2023
2022
£million £million £million £million
Other payables 25.9 68.1 23.7 65.0
Amounts due to related companies - - 10.5 12.4
Accruals and deferred income 11.8 10.0 10.5 8.5
37.7 78.1 44.7 85.9
29. Provisions for liabilities and charges
Group Company
ECL allowance on ECL allowance on loan commitments
loan commitments
Other Total £million Other Total
£million
£million £million £million £million
Balance at 1 January 2022 0.9 0.4 1.3 0.9 0.4 1.3
Charge to income statement 0.2 1.9 2.1 0.2 1.4 1.6
Utilised - (0.9) (0.9) - (0.9) (0.9)
Balance at 31 December 2022 1.1 1.4 2.5 1.1 0.9 2.0
(Credit)/charge to income statement (0.3) 8.5 8.2 (0.3) 7.2 6.9
Utilised - (4.7) (4.7) - (3.3) (3.3)
Balance at 31 December 2023 0.8 5.2 6.0 0.8 4.8 5.6
ECL allowance on loan commitments
In accordance with the requirements of IFRS 9, the Group holds an ECL
allowance against loans it has committed to lend, but have not yet been drawn.
For the Real Estate Finance and Commercial Finance portfolios, where a loan
facility is agreed that includes both drawn and undrawn elements and the Group
cannot identify the ECL on the loan commitment separately, a combined loss
allowance for both drawn and undrawn components of the loan is presented as a
deduction from the gross carrying amount of the drawn component, with any
excess of the loss allowance over the gross drawn amount presented as a
provision. At 31 December 2023 and 31 December 2022, no provision was held for
losses in excess of drawn amounts.
Other
Other includes:
· provision for fraud, which relates to cases where the Group has
reasonable evidence of suspected fraud, but further investigation is required
before the cases can be dealt with appropriately;
· s75 Consumer Credit Act 1974 provision;
· costs and redress relating to the BiFD Vehicle Finance
collections review (see Note 8 for further details and key sources of
estimation uncertainty below); and
· costs and redress relating to further customer redress
initiatives.
The Directors expect all provisions to be fully utilised within the next one
to two years.
Provisions for liabilities and charges accounting policy
A provision is recognised where there is a present obligation as a result of a
past event, it is probable that the obligation will be settled and it can be
reliably estimated.
29.1 Key sources of estimation uncertainty
Redress/goodwill provision amounts relating to the BiFD Vehicle Finance
collections review are £2.0 million, and are based on an estimate of
customers potentially impacted over a number of years. As at 31 December 2023,
the scope of the review and amounts of potential redress/goodwill are not yet
finalised. Increasing the impact period by one year potentially increases the
provision by £0.3 million. Increasing redress/goodwill amounts by 10% would
increase the provision by £0.2 million.
30. Subordinated liabilities
Group and Company
2023 2022
£million £million
Notes at par value 90.0 50.0
Unamortised issue costs (0.9) (0.1)
Accrued interest 4.0 1.2
93.1 51.1
On 28 February 2023, the Group issued £90.0 million 13.0% Fixed Rate Reset
Callable Subordinated Notes due August 2033. The notes are listed on the
International Securities Market of the London Stock Exchange. This issuance is
in line with the Group's funding strategy and supports the Group's stated
medium-term growth ambitions.
· The notes are redeemable for cash at their principal amount on
fixed dates.
· The Company has a call option to redeem the notes early in the
event of a 'tax event' or a 'capital disqualification event', which is at the
full discretion of the Company.
· Interest payments are paid at six-monthly intervals and are
mandatory.
· The notes give the holders' rights to the principal amount on
the notes, plus any unpaid interest, on liquidation. Any such claims are
subordinated to senior creditors, but rank pari passu with holders of other
subordinated obligations and in priority to holders of share capital.
The above features provide the issuer with a contractual obligation to deliver
cash or another financial asset to the holders, and therefore the notes are
classified as financial liabilities.
Transaction costs that are directly attributable to the issue of the notes and
are deducted from the financial liability and expensed to the income statement
on an effective interest rate basis over the expected life of the notes.
The notes are treated as Tier 2 regulatory capital, which is used to support
the continuing growth of the business taking into account increases in
regulatory capital buffers. The issue of the notes is part of an ongoing
programme to diversify and expand the capital base of the Group.
The Group redeemed all of its existing 6.75% Fixed Rate Reset Callable
Subordinated notes due in 2028, that also qualified as Tier 2 capital, with
first call dates in 2023, in two tranches: £25.0 million on 28 February 2023;
and £25.0 million on 20 March 2023.
The accounting policy for subordinated liabilities is included in Note 1.5
Financial assets and financial liabilities accounting policy.
31. Contingent liabilities and commitments
31.1 Contingent liabilities
31.1.1 Laws and regulations
As a financial services business, the Group must comply with numerous laws and
regulations that significantly affect the way it does business. Whilst the
Group believes there are no material unidentified areas of failure to comply
with these laws and regulations, there can be no guarantee that all issues
have been identified.
In July 2023, the Group was contacted by the FCA in a follow up to a review of
forbearance outcomes associated with its Borrowers in Financial Difficulty
project. The Group is responding to requirements from the FCA to review its
practices in this area. In respect of its Vehicle Finance business see Note
29. In respect of its Retail Finance business, it is not possible to estimate
or reliably predict the outcome of this review and its financial effect on the
Group.
31.1.2 Discretionary motor finance commissions
On 11 January 2024, the FCA announced a review of historical motor finance
commission arrangements. The Group operated some discretionary commission
arrangements from 2009 until June 2017. While it is possible that certain
charges may be incurred in the future, the Directors do not consider that a
legal or constructive obligation exists that would require a provision to be
recognised at this stage. There is also significant uncertainty about the
outcome of the FCA's review, the timing and scope, and therefore the quantum
of any potential financial impact cannot be reliably estimated at present. The
FCA plans to set out its next steps in Q3 2024, when the implications for the
industry should become clearer.
31.1.2.1 Critical accounting judgement
In determining the appropriate accounting and disclosure for potential claims
in relation to historical motor finance commissions, the Directors have
considered the criteria under IAS 37 for provisioning, and have judged that
the threshold is currently not met. However, in the Directors' judgement, it
is possible, dependent on future events, that costs could be incurred in
relation to this matter and we have therefore disclosed a contingent
liability.
31.2 Capital commitments
At 31 December 2023, the Group and Company had capital commitments of £nil
(2022: £1.5 million).
31.3 Credit commitments
Group and Company
Commitments to extend credit to customers were as follows:
2023 2022
£million £million
Consumer Finance
Retail Finance 91.6 97.2
Vehicle Finance 1.3 1.2
Business Finance
Real Estate Finance 58.9 53.1
Commercial Finance 149.5 146.5
301.3 298.0
32. Share capital
Number £million
At 1 January 2022 18,647,805 7.5
Issued during 2022 43,629 -
At 31 December 2022 18,691,434 7.5
Issued during 2023 326,361 0.1
At 31 December 2023 19,017,795 7.6
Share capital comprises ordinary shares with a par value of 40 pence each.
Equity instruments accounting policy
Equity instruments issued by the Company are recorded at the proceeds
received, net of direct issuance costs. Any amounts received over nominal
value are recorded in the share premium account, net of direct issuance costs.
Costs associated with the listing of shares are expensed immediately.
33. Other reserves
Group Group Company Company
2023
2022
2023
2022
£million £million £million £million
Cash flow hedge reserve (0.3) (0.8) (0.3) (0.8)
Own shares (1.4) (0.3) (1.4) (0.3)
(1.7) (1.1) (1.7) (1.1)
33.1 Own shares
Employee Benefit Trust ('EBT') 2023 Nominal 2022 Nominal
value
value
Number
2023 Number
2022
£million £million
At 1 January 37,501 - - -
Shares acquired 188,835 0.1 37,501 -
Shares disposed (9,864) - - -
At 31 December 216,472 0.1 37,501 -
Market value (£million) 1.5 0.3
Accounting value (£million) 1.4 0.3
Percentage of called up share capital 1.1% 0.2%
These shares are held in trust for the benefit of employees, who will be
exercising their options under the Group's share options schemes. The
trustee's expenses are included in the operating expenses of the Group. The
maximum number of shares held by the EBT during the year was 226,336 (2022:
37,501), which had a nominal value of £91,000 (2022: £15,000). Shares were
disposed of during the year for consideration of £4,000.
Own shares accounting policy
The EBT qualifies for 'look-through' accounting, under which the EBT is
treated as, in substance, an extension of the sponsoring entity, which is
Secure Trust Bank PLC. Own shares represent the shares of the Parent Company,
Secure Trust Bank PLC, that are held by the EBT. Own shares are recorded at
cost and deducted from equity.
34. Share-based payments
At 31 December 2023 and 31 December 2022, the Group had four share-based
payment schemes in operation:
· 2017 Long-Term Incentive Plan,
· 2017 Sharesave Plan,
· 2017 Deferred Bonus Plan, and
· 'Phantom' Share Option Scheme.
A summary of the movements in share options during the year is set out below:
Outstanding at Granted Forfeited Exercised Outstanding at Vested and exercisable at 31 December 2023 Vesting Weighted Weighted
during the year
lapsed and cancelled
during the year
average
average
1 January 2023
during the year
31 December 2023 Number dates
Number
Number
exercise price of options exercise price of options
Number Number Number
outstanding at
outstanding at
31 December 2023 31 December
2022
£
£
Equity settled
2017 Long-Term Incentive Plan 611,353 281,282 (161,233) (13,304) 718,098 12,336 2024-2028 0.40 0.40
2017 Sharesave Plan 545,479 303,937 (123,809) (321,694) 403,913 44,843 2024-2026 5.93 6.24
2017 Deferred Bonus Plan 49,807 39,953 - (1,227) 88,533 18,389 2024-2026 0.40 0.40
1,206,639 625,172 (285,042) (336,225) 1,210,544 75,568 2.25 3.04
Weighted average exercise price 3.04 2.85 3.56 5.10 2.25 3.31
Cash settled
'Phantom' 78,167 - (40,167) - 38,000 38,000 2019 25.00 25.00
share option scheme
Group Group Company Company
2023 2022 2023 2022
£million £million £million £million
Expense incurred in relation to share-based payments 1.1 1.8 0.9 1.4
34.1. Long-Term Incentive Plan ('LTIP')
The LTIP was established on 3 May 2017. Two separate awards to a number of
participants were made under this plan during the year, as set out below.
34.1.1 LTIP Restricted share award
63,975 (2022: 54,427) options were awarded during the year that were not
subject to any performance conditions. The awards will vest three years from
the date of grant. The original grant date valuation was determined using a
Black-Scholes model. Measurement inputs and assumptions used for the grant
date valuation were as follows:
Awarded during 2023 Awarded during
2022
Share price at grant date £6.70 £12.40
Exercise price £0.40 £0.40
Expected dividend yield 5.20% 4.39%
Expected stock price volatility 42.93% 47.27%
Risk free interest rate 3.44% 1.47%
Average expected life (years) 3.00 3.00
Original grant date valuation £5.37 £10.49
34.1.2 LTIP
217,307 (2022: 176,362) options were awarded during the year that are subject
to four performance conditions, which are based on:
· rank of the Total Shareholder Return ('TSR') over the
performance period against the TSR of the comparator group of peer group
companies;
· increase in Return On Average Equity ('RoAE') over the
performance period;
· increase in Earnings Per Share ('EPS') over the performance
period; and
· maintaining appropriate risk practices over the performance
period, reflecting the longer-term strategic risk management of the Group.
The awards have a performance term of three years. The awards will vest on the
date on which the Board determines that these conditions have been met.
109,382 options will be released to the participants on the vesting date and
107,925 options will be released two years after the vesting date.
The original grant date valuation was determined using a Black-Scholes model
for the RoAE, EPS and risk management tranches (modified for probability of
outturn), and a Monte Carlo model for the TSR tranche. Measurement inputs and
assumptions used for the grant date valuation were as follows:
Awarded during Awarded during Awarded during
2023 2023 2022
No holding period Two year
holding
period
Share price at grant date £6.70 £6.70 £12.40
Exercise price £0.40 £0.40 £0.40
Expected dividend yield 5.20% 5.20% 4.39%
Expected stock price volatility 40.0% 40.0% 46.87%
Risk free interest rate 3.49% 3.42% 1.50%
Average expected life (years) 3.00 5.00 3.00
Original grant date valuation £2.98 £2.69 £7.43
34.2. Sharesave Plan
The Sharesave Plan was established on 3 May 2017. This plan allows all
employees to save for three years, subject to a maximum monthly amount of
£250 (2022: £500), with the option to buy shares in Secure Trust Bank PLC
when the plan matures. Participants cannot change the amount that they have
agreed to save each month, but they can suspend payments for up to six months.
Participants can withdraw their savings at any time but, if they do this
before the completion date, they lose the option to buy shares at the Option
Price, and in most circumstances if participants cease to hold plan-related
employment before the third anniversary of the grant date, then the options
are also lost. The options ordinarily vest approximately three years after
grant date and are exercisable for a period of six months following vesting.
The original grant date valuation was determined using a Black-Scholes model.
Measurement inputs and assumptions used were as follows:
Awarded during 2023 Awarded during 2022
Share price at grant date £6.30 £9.62
Exercise price £5.43 £8.10
Expected stock price volatility 37.25% 48.47%
Expected dividend yield 5.20% 4.39%
Risk free interest rate 4.52% 3.24%
Average expected life (years) 3.00 3.00
Original grant date valuation £1.63 £3.14
34.3. Deferred Bonus Plan
The Deferred Bonus Plan was established on 3 May 2017. In 2023 and 2022,
awards were granted to certain senior managers of the Group. The awards vest
in three equal tranches after one, two and three years following deferral.
Accordingly, the following awards remain outstanding under the plan, entitling
the members of the scheme to purchase shares in the Company:
Awards granted Awards granted Awards granted Awards
Vesting after
Vesting after
Vesting after
granted
one year
two years
three years
Total
Number
Number
Number
At 1 January 2022 5,727 6,836 7,123 19,686
Granted 12,779 12,779 12,786 38,344
Exercised (5,727) (2,496) - (8,223)
At 31 December 2022 12,779 17,119 19,909 49,807
Granted 13,315 13,315 13,323 39,953
Exercised (401) - (826) (1,227)
At 31 December 2023 25,693 30,434 32,406 88,533
Vested and exercisable 12,378 4,340 1,671 18,389
The original grant date valuation was determined using a Black-Scholes model.
Measurement inputs and assumptions used were as follows:
Granted in 2023 Granted in 2023 Granted in 2023
Awards vesting after one year Awards vesting after two years Awards vesting after three years
Share price at grant date £6.70 £6.70 £6.70
Exercise price £0.40 £0.40 £0.40
Expected dividend yield 5.20% 5.20% 5.20%
Expected stock price volatility 44.41% 38.77% 42.93%
Risk free interest rate 3.97% 3.40% 3.44%
Average expected life (years) 1.00 2.00 3.00
Original grant date valuation £5.98 £5.66 £5.37
34.3. Deferred Bonus Plan continued
Granted in 2022 Granted in 2022 Granted in 2022
Awards vesting after one years
Awards vesting after two years
Awards vesting after three years
Share price at grant date £12.40 £12.40 £12.40
Exercise price £0.40 £0.40 £0.40
Expected dividend yield 4.39% 4.39% 4.39%
Expected stock price volatility 32.04% 42.03% 47.27%
Risk free interest rate 1.39% 1.46% 1.47%
Average expected life (years) 1.00 2.00 3.00
Original grant date valuation £11.47 £10.97 £10.49
34.4 Cash settled share-based payments
On 16 March 2015, a four-year 'phantom' share option scheme was established in
order to provide effective long-term incentive to senior management of the
Group. Under the scheme, no actual shares would be issued by the Company, but
those granted awards under the scheme would be entitled to a cash payment. The
amount of the award is calculated by reference to the increase in the value of
an ordinary share in the Company over an initial value set at £25 per
ordinary share, being the price at which the shares resulting from the
exercise of the first tranche of share options under the share option scheme
were sold in the market in November 2014. The options vested during 2019 and
are exercisable for a period of 10 years after grant date.
As at 31 December 2023, using any reasonable range of inputs and assumptions,
the fair value of the 'phantom' options is £nil (2022: £0.04). Accordingly,
no liability was recognised in the consolidated financial statements at 31
December 2023 or 31 December 2022.
For each award granted during the year, expected volatility was determined by
calculating the historical volatility of the Group's share price over the
period equivalent to the expected term of the options being granted. The
expected life used in the model has been adjusted, based on management's best
estimate, for the effects of non-transferability, exercise restrictions,
and behavioural considerations.
Share-based compensation accounting policy
The fair value of equity settled share-based payment awards are calculated at
grant date and recognised over the period in which the employees become
unconditionally entitled to the awards (the vesting period). The amount is
recognised in operating expenses in the income statement, with a corresponding
increase in equity. Further details of the valuation methodology are set out
above.
The fair value of cash settled share-based payments is recognised in operating
expenses in the income statement with a corresponding increase in liabilities
over the vesting period. The liability is remeasured at each reporting date
and at the settlement date based on the fair value of the options granted,
with a corresponding adjustment to operating expenses.
35. Cash flow statement
35.1. Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash equivalents
comprise the following balances with less than three months' maturity from the
date of acquisition.
Group Group Company Company
2023
2023
2022
2022
£million
£million
£million £million
Cash and Bank of England reserve account 351.6 370.1 351.6 370.1
Loans and advances to banks (Note 13) 53.7 50.5 53.0 48.9
Debt securities - - - -
Less:
Cash ratio deposit (4.8) (3.7) (4.8) (3.7)
Collateral margin account (0.2) - (0.2) -
(5.0) (3.7) (5.0) (3.7)
Cash and cash equivalents 400.3 416.9 399.6 415.3
The Group and Company has no access to the cash ratio deposit or the
collateral margin accounts, so these amounts do not meet the definition of
cash and cash equivalents and accordingly they are excluded from cash and cash
equivalents.
35.2. Changes in liabilities arising from financing activities
All changes in liabilities arising from financing activities arise from
changes in cash flows, apart from £0.1 million (2022: £0.1 million) of lease
liabilities interest expense, as shown in Note 27, and £0.2 million (2022:
£0.2 million) amortisation of issue costs on subordinated liabilities, as
shown in Note 30.
Cash and cash equivalents accounting policy
For the purpose of the statement of cash flows, cash and cash equivalents
comprise cash in hand and demand deposits, and cash equivalents, being highly
liquid investments, which are convertible into cash with an insignificant risk
of changes in value with a maturity of three months or less at the date of
acquisition, including certain loans and advances to banks and short-term
highly liquid debt securities.
36. Financial risk management strategy
By their nature, the Group's activities are principally related to the use of
financial instruments. The Directors and senior management of the Group have
formally adopted a Group risk appetite statement that sets out the Board's
attitude to risk and internal controls. Key risks identified by the Directors
are formally reviewed and assessed at least once a year by the Board. In
addition key business risks are identified, evaluated and managed by operating
management on an ongoing basis by means of procedures, such as physical
controls, credit and other authorisation limits and segregation of duties. The
Board also receives regular reports on any risk matters that need to be
brought to its attention. Significant risks identified in connection with the
development of new activities are subject to consideration by the Board.
There are budgeting procedures in place and reports are presented regularly to
the Board detailing the results of each principal business unit, variances
against budget and prior year, and other performance data.
A more detailed description of the risk governance structure is contained in
the Principal risks and uncertainties section.
Included within the principal financial risks inherent in the Group's business
are credit risk (Note 37), market risk (Note 38), liquidity risk (Note 39),
and capital risk (Note 40).
37. Credit risk
The Company and Group take on exposure to credit risk, which is the risk that
a counterparty will be unable to satisfy their debt servicing commitments when
due. Counterparties include the consumers to whom the Group lends on a secured
and unsecured basis and Small and Medium size Enterprises ('SMEs') to whom the
Group primarily lends on a secured basis, as well as the market counterparties
with whom the Group deals.
Impairment provisions are provided for expected credit losses at the statement
of financial position date. Significant changes in the economy could result in
losses that are different from those provided for at the statement of
financial position date. Management therefore carefully manages the Group's
exposures to credit risk as it considers this to be the most significant risk
to the business. Disclosures relating to collateral on loans and advances to
customers are disclosed in Note 14.
The Board monitors the ratings of the counterparties in relation to the
Group's loans and advances to banks. Disclosures of these at the year-end are
contained in Note 13. There is no direct exposure to the Eurozone and
peripheral Eurozone countries.
See the Principal risks and uncertainties section for further details on the
mitigation and change during the year of credit risk.
Group and Company
With the exception of loans and advances to customers, the carrying amount of
financial assets represents the maximum exposure to credit risk. The maximum
exposure to credit risk for loans and advances to customers by portfolio and
IFRS 9 stage without taking account of any collateral held or other credit
enhancements attached was as follows:
Stage 1 <= 30 days > 30 days Stage 2 Stage 3 Total gross loans and advances to customers£million
past due
past due
£million
Total £million
£million £million
£million
31 December 2023
Consumer Finance
Retail Finance 1,149.2 92.9 4.4 97.3 8.8 1,255.3
Vehicle Finance 420.1 34.3 20.4 54.7 38.3 513.1
Business Finance
Real Estate Finance 1,024.9 134.4 1.5 135.9 91.0 1,251.8
Commercial Finance 357.3 9.9 - 9.9 16.0 383.2
Total drawn exposure 2,951.5 271.5 26.3 297.8 154.1 3,403.4
Off balance sheet
Loan commitments 299.1 2.2 - 2.2 - 301.3
Total gross exposure 3,250.6 273.7 26.3 300.0 154.1 3,704.7
Less:
Impairment allowance (29.5) (10.5) (7.7) (18.2) (40.4) (88.1)
Provision for loan commitments (0.8) - - - - (0.8)
Total net exposure 3,220.3 263.2 18.6 281.8 113.7 3,615.8
£117.8 million (2022: £16.1 million) of collateral in the form of property
has been pledged as security for Real Estate Finance Stage 3 balances of
£84.0 million (2022: £14.8 million). £21.0 million (2022: £11.2 million)
of collateral in the form of vehicles has been pledged as security for
Vehicle Finance Stage 3 balances of £14.7 million (2022: £6.1 million).
Stage 1 Stage 2 Stage 3 Total gross
loans and advances to customers
£million
£million <= 30 days > 30 days Total Total
past due
past due
£million £million
£million £million
31 December 2022
Consumer Finance
Retail Finance 987.4 85.4 3.8 89.2 6.1 1,082.7
Vehicle Finance 306.8 83.3 3.8 87.1 23.6 417.5
Business Finance
Real Estate Finance 957.9 122.9 21.3 144.2 16.8 1,118.9
Commercial Finance 327.7 50.2 - 50.2 0.5 378.4
Total drawn exposure 2,579.8 341.8 28.9 370.7 47.0 2,997.5
Off balance sheet
Loan commitments 298.0 - - - - 298.0
Total gross exposure 2,877.8 341.8 28.9 370.7 47.0 3,295.5
Less:
Impairment allowance (24.3) (23.9) (4.7) (28.6) (25.1) (78.0)
Provision for loan commitments (1.1) - - - - (1.1)
Total net exposure 2,852.4 317.9 24.2 342.1 21.9 3,216.4
A reconciliation of opening to closing allowance for impairment of loans and
advances to customers is presented in Note 16.
Company
In addition to the above, counterparties to the Company include subsidiary
undertakings. For the ECL on amounts due from related companies, see Note 24.
37.1. Concentration risk
Management assesses the potential concentration risk from geographic, product
and individual loan concentration. Due to the nature of the Group's lending
operations, the Directors consider the lending operations of the Group as a
whole to be well diversified. Details of the Group's loans and advances to
customers and loan commitments by product is provided in Notes 3 and 31,
respectively.
Geographical concentration
The Group's Real Estate Finance loan book is secured against UK property only.
The geographical concentration of these business loans and advances to
customers, by location of the security, is as follows:
Group and Company
£million £million
2023 2022
Central England 99.5 101.9
Greater London 709.5 689.7
Northern England 89.2 68.7
South East England (excl. Greater London) 233.3 189.5
South West England 40.7 20.4
Scotland, Wales and Northern Ireland 79.6 48.7
Gross loans and receivables 1,251.8 1,118.9
Allowance for impairment (8.0) (3.4)
Total 1,243.8 1,115.5
37.2. Forbearance
Consumer Finance
Throughout the year, the Group did not routinely reschedule contractual
arrangements where customers default on their repayments. In cases where it
offered the customer the option to reduce or defer payments for a short
period, in line with our responsibilities from a conduct perspective, the
loans retained the normal contractual payment due dates and were treated the
same as any other defaulting cases for impairment purposes. Arrears tracking
would continue on the account, with any impairment charge being based on the
original contractual due dates for all products.
All forbearance arrangements are formally discussed and agreed with the
customer in accordance with regulatory guidance on the support of customers.
By offering customers in financial difficulty the option of forbearance, the
Group potentially exposes itself to an increased level of risk through
prolonging the period of non-contractual payment. All forbearance arrangements
are reviewed and monitored regularly to assess the ongoing potential risk,
suitability and sustainability to the Group. As at the year end, the Consumer
Finance business approximately had the following cases (by volume) in
forbearance:
· Retail Finance 0.15% (2022: 0.15%); and
· Vehicle Finance: 0.11% (2022: 0.16%).
In respect of Vehicle Finance, where forbearance measures are not possible or
are considered not to be in the customer's best interests, or where such
measures have been tried and the customer has not adhered to the forbearance
terms that have been agreed, the Group will consider realising its security
and taking possession of the vehicle in order to sell it and clear the
outstanding debt. Where the sale of the vehicle does not cover all of the
remaining loan, normal credit collection procedures may be carried out in
order to recover the outstanding debt, or the debt may be sold to a third
party debt recovery agent, or in certain circumstances, the debt may be
written off.
Real Estate Finance
Where clients provided evidence of payment difficulties, they were supported
by the provision of extensions to loan maturity dates. A small number of
clients, who experienced difficulties in meeting their financial commitments,
were offered concessions (facility restructures or amendments) that Real
Estate Finance would not have provided under normal circumstances. As at 31
December 2023, 9.6% of accounts were classed as forborne (2022: 4.3%). Where
forbearance measures are not possible or are considered not to be in the
client's best interests, or where such measures have been tried and the
customer has not adhered to the forbearance terms that have been agreed, the
Group will consider realising its security.
38. Market risk
The Group's market risk is primarily linked to interest rate risk. Interest
rate risk refers to the exposure of the Group's financial position to adverse
movements in interest rates.
When interest rates change, the present value and timing of future cash flows
change. This, in turn, changes the underlying value of the Group's assets,
liabilities and off-balance sheet instruments, and hence, its economic value.
Changes in interest rates also affect the Group's earnings by altering
interest-sensitive income and expenses, affecting its net interest income.
The principal currency in which the Group operates is Sterling, although a
small number of transactions are completed in US dollars, Euros and other
currencies in the Commercial Finance business. The Group has no significant
exposures to foreign currencies and hedges any residual currency risks to
Sterling. The Group does not operate a trading book.
See the Principal risks and uncertainties section for further details on the
mitigation and change during the year of market risk.
Interest rate risk
Group and Company
The Group seeks to 'match' interest rate risk on either side of the statement
of financial position and hedges residual mismatch in accordance with risk
appetites. However, this is not a perfect match and interest rate risk is
present on the mismatch between fixed rate loans and savings products and
variable rate assets and liabilities.
The Group monitors the interest rate mismatch on at least a monthly basis,
using market value sensitivity and earnings at risk, which were as follows at
31 December:
2023 2022
£million £million
Market value sensitivity
+200bp parallel shift in yield curve 2.5 1.8
-200bp parallel shift in yield curve (2.7) (1.9)
Earnings at risk sensitivity
+100bp parallel shift in yield curve 1.2 1.2
-100bp parallel shift in yield curve (1.2) (1.2)
The Directors consider that 200bps in the case of market value sensitivity and
100bps in the case of earnings at risk are a reasonable approximation of
possible changes.
39. Liquidity and funding risk
Liquidity and funding risk is the risk that the Group is unable to meet its
obligations as they fall due or can only do so at excessive cost. The Group
maintains adequate liquidity resources and a prudent, stable funding profile
at all times to cover liabilities as they fall due in normal and stressed
conditions.
The Group manages its liquidity in line with internal and regulatory
requirements, and at least annually assesses the robustness of the liquidity
requirements as part of the Group's Internal Liquidity Adequacy Assessment
Process ('ILAAP').
See the Principal risks and uncertainties section for further details on the
mitigation and change during the year of liquidity and funding risk.
The tables below analyse the contractual undiscounted cash flows for financial
liabilities into relevant maturity groupings:
Carrying amount Gross nominal outflow Not more More than three months but less than one year More than More than
than three months
one year but less than five years
five years
£million £million
£million
£million £million £million
At 31 December 2023
Due to banks 402.0 435.9 12.1 15.4 408.4 -
Deposits from customers 2,871.8 2,949.5 1,532.0 806.7 608.9 1.9
Subordinated liabilities 93.1 148.5 5.9 5.9 136.7 -
Lease liabilities 2.3 2.4 0.2 0.7 1.5 -
Other financial liabilities 25.9 25.9 25.9 - - -
3,395.1 3,562.2 1,576.1 828.7 1,155.5 1.9
Derivative financial liabilities 22.0 23.4 2.8 5.6 15.0 -
3,417.1 3,585.6 1,578.9 834.3 1,170.5 1.9
Carrying amount Gross nominal outflow Not more More than three months but less than one year More than More than
than three
one year but less than five years
five years
£million £million
months £million
£million £million
£million
At 31 December 2022
Due to banks 400.5 438.7 10.6 10.2 417.9 -
Deposits from customers 2,514.6 2,565.0 956.7 1,030.0 577.2 1.1
Subordinated liabilities 51.1 53.4 0.8 52.6 - -
Lease liabilities 2.1 2.2 0.2 0.5 1.5 -
Other financial liabilities 68.1 68.1 68.1 - - -
3,036.4 3,127.4 1,036.4 1,093.3 996.6 1.1
Derivative financial liabilities 26.7 27.5 4.4 12.2 10.9 -
3,063.1 3,154.9 1,040.8 1,105.5 1,007.5 1.1
Company
The contractual undiscounted cash flows for financial liabilities of the
Company are the same as above except for the following:
Carrying amount Gross nominal outflow Not more More than three months but less than one year More than More than
than three months
one year but less than five years
five years
£million £million
£million
£million £million £million
At 31 December 2023
Lease liabilities 2.1 2.1 0.2 0.7 1.2 -
Other financial liabilities 34.2 34.2 34.2 - - -
Non-derivative financial liabilities 3,403.2 3,570.2 1,584.4 828.7 1,155.2 1.9
Total 3,425.2 3,593.6 1,587.2 834.3 1,170.2 1.9
Carrying amount Gross nominal outflow Not more More than three months but less than one year More than More than
than three
one year but less than five years
five years
£million £million
£million
months £million £million
£million
At 31 December 2022
Lease liabilities 1.9 2.0 0.2 0.5 1.3 -
Other financial liabilities 77.4 77.4 77.4 - - -
Non-derivative financial liabilities 3,045.5 3,136.5 1,045.7 1,093.3 996.4 1.1
Total 3,072.2 3,164.0 1,050.1 1,105.5 1,007.3 1.1
40. Capital risk
Capital risk is the risk that the Group will have insufficient capital
resources to meet minimum regulatory requirements and to support the business.
The Group adopts a conservative approach to managing its capital and at least
annually assesses the robustness of the capital requirements as part of the
Group's Internal Capital Adequacy Assessment Process ('ICAAP'). The Group has
Tier 1 and Tier 2 capital resources, noting the regulatory adjustments
required in the table below.
The following table, which is unaudited and therefore not in scope of the
Independent Auditor's Report, shows the regulatory capital resources for the
Group.
2023 Restated¹
2022
£million
£million
(unaudited)
(unaudited)
CET 1
Share capital 7.6 7.5
Share premium 83.8 82.2
Retained earnings 254.8 237.8
Own shares (1.4) (0.3)
IFRS 9 transition adjustments (See below for further details) 2.1 11.7
Goodwill (1.0) (1.0)
Intangible assets net of attributable deferred tax (4.9) (5.6)
CET1 capital before foreseeable dividend 341.0 332.3
Foreseeable dividend (3.1) (5.4)
CET1 and Tier 1 capital 337.9 326.9
Tier 2
Subordinated liabilities 89.1 49.9
Less ineligible portion (29.4) -
Total Tier 2 capital(2) 59.7 49.9
Own funds 397.6 376.8
Reconciliation to total equity:
IFRS 9 transition adjustments (2.1) (11.7)
Eligible subordinated liabilities (59.7) (49.9)
Cash flow hedge reserve (0.3) (0.8)
Goodwill and other intangible assets net of attributable deferred tax 5.9 6.6
Foreseeable dividend 3.1 5.4
Total equity 344.5 326.4
1. Restated to reflect a change in accounting policy relating to land and
buildings, which are now presented at historical cost. See Note 1.3 for
further details.
2. Tier 2 capital comprises solely subordinated debt, excluding accrued
interest, capped at 25% of the Pillar 1 and 2A requirements as set by the PRA.
The Group has elected to adopt the IFRS 9 transitional rules. In 2022, this
allowed for 25% of the initial IFRS 9 transitional adjustment, net of
attributable deferred tax, and for increases in provisions between 1 January
2018 to 31 December 2019, except where these provisions relate to defaulted
accounts, to be added back to eligible capital. This part of the relief has
now ended. The relief for increases in provisions since 1 January 2020.
however continues to apply at 50% in 2023 (2022: 75%). This relief will taper
off by 31 December 2024
The Group's regulatory capital is divided into:
· CET 1 capital, which comprises shareholders' funds, after
adding back the IFRS 9 transition adjustment and deducting qualifying
intangible assets, both of which are net of attributable deferred tax.
· Tier 2 capital, which is solely subordinated debt net of
unamortised issue costs, capped at 25% of the capital requirement
The Group operates the standardised approach to credit risk, whereby risk
weightings are applied to the Group's on and off balance sheet exposures. The
weightings applied are those stipulated in the Capital Requirements
Regulation.
Further information on capital is included within our Pillar 3 disclosures,
which can be found on the Group's website. See the Principal risks and
uncertainties section for further details on the mitigation and change during
the year of capital risk.
The Group is subject to capital requirements imposed by the PRA on all
financial services firms. During the year, the Group complied with these
requirements.
41. Classification of financial assets and liabilities
Group
Total carrying amount Fair value Total carrying amount Fair value Fair value hierarchy level
£million £million Fair value £million £million 2022
2023 2023 hierarchy level 2022 2022
2023
Cash and Bank of England reserve account 351.6 351.6 Level 1 370.1 370.1 Level 1
Loans and advances to banks 53.7 53.7 Level 2 50.5 50.5 Level 2
Loans and advances to customers 3,315.3 3,279.7 Level 3 2,919.5 2,895.6 Level 3
Derivative financial instruments 25.5 25.5 Level 2 34.9 34.9 Level 2
Other financial assets 2.4 2.4 Level 3 1.7 1.7 Level 3
3,748.5 3,712.9 3,376.7 3,352.8
Due to banks 402.0 402.0 Level 2 400.5 400.5 Level 2
Deposits from customers 2,871.8 2,850.1 Level 3 2,514.6 2,494.0 Level 3
Derivative financial instruments 22.0 22.0 Level 2 26.7 26.7 Level 2
Lease liabilities 2.3 2.3 Level 3 2.1 2.1 Level 3
Other financial liabilities 25.9 25.9 Level 3 68.1 68.1 Level 3
Subordinated liabilities 93.1 94.8 Level 3 51.1 43.5 Level 2
3,417.1 3,397.1 3,063.1 3,034.9
All financial assets and liabilities at 31 December 2023 and 31 December 2022
were carried at amortised cost, except for derivative financial instruments
that are at fair value through profit and loss. Therefore, for these assets
and liabilities, the fair value hierarchy noted above relates to the
disclosure in this note only.
Company
Total carrying amount Fair value Fair value hierarchy level Total carrying amount Fair value Fair value hierarchy level
£million £million 2023 £million £million 2022
2023 2023 2022 2022
At 31 December 2023
Cash and Bank of England reserve account 351.6 351.6 Level 1 370.1 370.1 Level 1
Loans and advances to banks 53.0 53.0 Level 2 48.9 48.9 Level 2
Loans and advances to customers 3,315.3 3,279.7 Level 3 2,919.5 2,895.6 Level 3
Derivative financial instruments 25.5 25.5 Level 2 34.9 34.9 Level 2
Other financial assets 5.0 5.0 Level 3 4.6 4.6 Level 3
3,750.4 3,714.8 3,378.0 3,354.1
Due to banks 402.0 402.0 Level 2 400.5 400.5 Level 2
Deposits from customers 2,871.8 2,850.1 Level 3 2,514.6 2,494.0 Level 3
Derivative financial instruments 22.0 22.0 Level 2 26.7 26.7 Level 2
Lease liabilities 2.1 2.1 Level 3 1.9 1.9 Level 3
Other financial liabilities 34.2 34.2 Level 3 77.4 77.4 Level 3
Subordinated liabilities 93.1 94.8 Level 3 51.1 43.5 Level 2
3,425.2 3,405.2 3,072.2 3,044.0
All financial assets and liabilities at 31 December 2023 and 31 December 2022
were carried at amortised cost except for derivative financial instruments
that are valued at fair value through profit and loss. Therefore, for these
assets, the fair value hierarchy noted above relates to the disclosure in this
note only.
Fair value classification
The tables above include the fair values and fair value hierarchies of the
Group and Company's financial assets and liabilities. The Group measures fair
value using the following fair value hierarchy that reflects the significance
of the inputs used in making measurements:
· Level 1: Quoted prices in active markets for identical assets
or liabilities.
· Level 2: Inputs other than quoted prices included within Level
1 that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices).
· Level 3: Inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
Loans and advances to customers and Deposits from customers
The fair value of the financial assets and liabilities is calculated based
upon the present value of the expected future principal and interest cash
flows. The rate used to discount the cash flows was a market rate of interest
at the balance sheet date. For loans and advances to customers, the same
assumptions regarding the risk of default were applied as those used to derive
the carrying value.
Debt securities
The fair value of debt securities is based on the quoted price where
available.
Derivative financial instruments
The fair value of derivative financial instruments is calculated based on the
present value of the expected future cash flows of the instruments. The rate
used to discount the cash flows was the SONIA forward curve at the balance
sheet date.
Subordinated liabilities
The fair value of subordinated liabilities is calculated based on quoted
market prices where available, or where an active market quote is not
available, it is calculated based on the present value of the expected future
cash flows of the instruments. The rate used to discount the cash flows was
the UK Government five year bond plus the initial spread on the instruments.
For all remaining financial assets and liabilities, the fair value of
financial assets and liabilities is calculated to be equivalent to their
carrying value due to their short maturity dates.
42. Related party transactions
Related parties of the Company and Group include subsidiaries, key management
personnel, close family members of key management personnel and entities that
are controlled, jointly controlled or significantly influenced, or for which
significant voting power is held, by key management personnel or their close
family members.
No transactions greater than £0.1 million were entered into with key
management personnel or their close family members during the current or prior
year.
The Company undertook the following transactions with other companies in the
Secure Trust Bank Group:
2023 2022
£million £million
Interest income and similar income (28.8) (26.2)
Gain on sale of defaulted debt - 0.2
Operating expenses (0.4) (0.4)
Waiver of intercompany balance - (0.2)
Allowances for impairment of amounts due from related companies (2.1) -
Investment income 10.2 14.0
(21.1) (12.6)
Equity contribution to subsidiaries re. share-based payments 0.2 0.4
The loans and advances with, and amounts receivable and payable to, related
companies are noted below:
Company Company
2023
2022
£million £million
Amounts receivable from subsidiary undertakings 2.7 3.1
Amounts due to subsidiary undertakings (10.5) (12.4)
(7.8) (9.3)
All amounts above are repayable on demand and the Company charged interest at
a variable rate on amounts outstanding.
Directors' remuneration
The Directors' emoluments (including pension contributions and benefits in
kind) for the year are disclosed in the Directors' Remuneration Report in the
Annual Report and Accounts.
At the year-end the ordinary shares held by the Directors are disclosed in the
Directors' Remuneration Report in the Annual Report and Accounts. Details of
the Directors' holdings of share options, as well as details of those share
options exercised during the year, are also disclosed in the Directors'
Report.
43. Immediate parent company and ultimate controlling party
The Company has no immediate parent company or ultimate controlling party.
44. Country-by-Country reporting
The Capital Requirements (Country-by-Country Reporting) Regulations 2013
introduced reporting obligations for institutions within the scope of CRD V.
The requirements aim to give increased transparency regarding the activities
of institutions. The
Country-by-Country information is set out below:
Name Nature Location Turnover Average Profit before tax Tax paid
of activity
on profit
£million number of FTE £million
£million
employees
31 December 2023 Secure Trust Bank PLC Banking services UK 321.3 879 33.4 8.6
31 December 2022 Secure Trust Bank PLC Banking services UK 208.3 940 44.0 7.0
45. Post balance sheet events
There have been no significant events between 31 December 2023 and the date of
approval of these financial statements which would require a change to or
additional disclosure in the financial statements.
Five-year summary (unaudited)
2023 2021 2020
£million 2022 £million £million 2019
£million £million
Profit for the year
Continuing operations
Interest and similar income 304.0 203.0 163.9 173.1 191.4
Interest expense and similar charges (136.5) (50.4) (27.7) (39.4) (46.0)
Net interest income 167.5 152.6 136.2 133.7 145.4
Net fee and commission income 17.2 17.0 12.7 10.8 20.1
Operating income 184.7 169.6 148.9 144.5 165.5
Net impairment charge on loans and advances to customers (43.2) (38.2) (5.0) (41.4) (32.6)
Gains/(losses) on modification of financial assets 0.3 1.1 1.5 (3.1) -
Fair value gains/(losses) on financial instruments 0.5 (0.3) (0.1) - -
Operating expenses (99.7) (93.2) (89.4) (81.8) (96.8)
Profit before income tax before exceptional items 42.6 39.0 55.9 18.2 36.1
Exceptional items (6.5) - - - -
Profit before income tax 36.1 39.0 55.9 18.2 36.1
Discontinued operations
(Loss)/profit before income tax (2.7) 5.0 0.1 0.9 -
Total profit before income tax 33.4 44.0 56.0 19.1 36.1
Continuing Continuing Continuing Continuing 2019
2023 2022 2021 2020 £million
£million £million £million £million
Earnings per share for profit attributable to the equity holders of the
Company during the year (pence per share)
Basic earnings per ordinary share 140.8 158.5 244.1 82.7 168.3
2023 Restated Restated 2020 2019
£million 2022 2021 £million £million
£million £million
Financial position
Cash and Bank of England reserve account 351.6 370.1 234.0 181.5 105.8
Loans and advances to banks 53.7 50.5 52.0 63.3 48.4
Debt securities - - 25.0 - 25.0
Loans and advances to customers 3,315.3 2,919.5 2,530.6 2,358.9 2,450.1
Fair value adjustment for portfolio hedged risk (3.9) (32.0) (3.5) 5.7 (0.9)
Derivative financial instruments 25.5 34.9 3.8 4.8 0.9
Other assets 35.8 36.6 44.0 47.0 51.4
Total assets 3,778.0 3,379.6 2,885.9 2,661.2 2,680.7
Due to banks 402.0 400.5 390.8 276.4 308.5
Deposits from customers 2,871.8 2,514.6 2,103.2 1,992.5 2,020.3
Fair value adjustment for portfolio hedged risk (1.4) (23.0) (5.3) 4.7 (0.7)
Derivative financial instruments 22.0 26.7 6.2 6.1 0.6
Subordinated liabilities 93.1 51.1 50.9 50.8 50.6
Other liabilities 46.0 83.5 37.7 63.1 49.4
Total shareholders' equity 344.5 326.2 302.4 267.6 252.0
Total liabilities and shareholders' equity 3,778.0 3,379.6 2,885.9 2,661.2 2,680.7
The 2021 and 2020 profits for the year have been restated to reflect the
disclosure of discontinued operations.
Appendix to the Annual Report (unaudited)
Key performance indicators and other alternative performance measures
All key performance indicators are based on continuing operations and
continuing loans and advances to customers, unless otherwise stated.
Restated prior year ratios reflect a change in accounting policy relating to
land and buildings, which are now presented at historical cost. See Note 1.3
for further details.
(i) Continuing loans and advances to customers
A reconciliation of total loans and advances to customers to continuing
operations loans and advances to customers is set out below:
2023 2022 2021 2020 2019 2018
£million £million £million £million £million £million
Loans and advances to customers 3,315.3 2,919.5 2,530.6 2,358.9 2,450.1 2,028.9
Assets held for sale - loan portfolios - - 1.3 - - -
Total loans and advances to customers 3,315.3 2,919.5 2,531.9 2,358.9 2,450.1 2,028.9
Less discontinued loans and advances to customers:
Asset Finance (sold during 2021) - - - (10.4) (27.7) (62.8)
DMS (sold during 2022) - - (79.6) (81.8) (82.4) (32.3)
Consumer Mortgages (sold during 2021) - - - (77.7) (105.9) (84.7)
Other - - (1.3) (4.1) (7.6) (11.2)
Total discontinued operations loans and advances to customers - - (80.9) (174.0) (223.6) (191.0)
Continuing loans and advances to customers 3,315.3 2,919.5 2,451.0 2,184.9 2,226.5 1,837.9
(ii) Net interest margin, net revenue margin and risk adjusted margin ratios
Net interest margin is calculated as net interest income for the financial
year as a percentage of the average loan book. Risk adjusted margin is
calculated as risk adjusted income for the financial year as a percentage of
the average loan book. Net revenue margin is calculated as operating income
for the financial year as a percentage of the average loan book. The
calculation of the average loan book is the average of the monthly balance of
loans and advances to customers, net of provisions, over 13 months:
Group 2023 2022 2021 2020 2019
£million £million £million £million £million
Net interest income 167.5 152.6 136.2 133.7 133.5
Opening loan book 2,919.5 2,451.0 2,184.9 2,226.5 1,837.9
Closing loan book 3,315.3 2,919.5 2,451.0 2,184.9 2,226.5
Average loan book 3,099.4 2,699.3 2,240.5 2,197.8 2,041.3
Net interest margin 5.4% 5.7% 6.1% 6.1% 6.5%
Retail Finance 2023 2022 2021 2020 2019
£million £million £million £million £million
Net interest income 73.1 61.2 56.1 57.7 58.1
Average loan book 1,143.4 898.8 692.9 663.4 651.9
Net interest margin 6.4% 6.8% 8.1% 8.7% 8.9%
Net interest income 73.1 61.2 56.1 57.7 58.1
Net fee and commission income 3.2 3.6 2.6 2.1 3.6
Net impairment charge on loans and advances to customers (15.9) (14.8) (5.0) (14.5) (19.8)
Gains/(losses) on modification of financial assets - 0.2 0.4 (0.6) -
Risk adjusted income 60.4 50.2 54.1 44.7 41.9
Risk adjusted margin 5.3% 5.6% 7.8% 6.7% 6.4%
Vehicle Finance 2023 2022 2021 2020 2019
£million £million £million £million £million
Net interest income 44.1 38.9 32.2 37.5 40.6
Average loan book 429.6 325.1 245.8 292.1 300.1
Net interest margin 10.3% 12.0% 13.1% 12.8% 13.5%
Net interest income 44.1 38.9 32.2 37.5 40.6
Net fee and commission income 1.8 1.4 1.1 0.6 0.6
Net impairment charge on loans and advances to customers (14.8) (21.3) (0.1) (20.7) (13.8)
Gains/(losses) on modification of financial assets 0.3 0.9 1.1 (2.5) -
Risk adjusted income 31.4 19.9 34.3 14.9 27.4
Risk adjusted margin 7.3% 6.1% 14.0% 5.1% 9.1%
Real Estate Finance 2023 2022 2021 2020 2019
£million £million £million £million £million
Net interest income 29.7 29.7 31.5 30.4 27.0
Net fee and commission income 0.9 0.2 0.3 - 1.0
Operating income 30.6 29.9 31.8 30.4 28.0
Net impairment charge on loans and advances to customers (4.5) (1.3) (0.1) (5.2) (0.1)
Risk adjusted income 26.1 28.6 31.7 25.2 27.9
Average loan book 1,177.7 1,114.9 1,045.3 1,020.4 867.5
Net revenue margin 2.6% 2.7% 3.0% 3.0% 3.2%
Risk adjusted margin 2.2% 2.6% 3.0% 2.5% 3.2%
Commercial Finance 2023 2022 2021 2020 2019
£million £million £million £million £million
Net interest income 13.2 11.4 6.5 4.4 4.0
Net fee and commission income 11.3 11.6 8.4 7.7 9.2
Operating income 24.5 23.0 14.9 12.1 13.2
Net impairment (charge)/credit on loans and advances to customers (8.0) (0.8) 0.2 (1.1) (0.1)
Risk adjusted income 16.5 22.2 15.1 11.0 13.1
Average loan book 348.8 360.7 259.6 221.9 221.8
Net revenue margin 7.0% 6.4% 5.7% 5.5% 6.0%
Risk adjusted margin 4.7% 6.2% 5.8% 5.0% 5.9%
These ratios show the net return on our lending assets, with and without
adjusting for cost of risk.
(iii) Yield
Yield is calculated as interest income and similar income for the financial
year as a percentage of the average loan book. The calculation of the average
loan book is the average of the monthly balance of loans and advances to
customers, net of provisions, over 13 months:
2023 2022
£million £million
Interest income and similar income 304.0 203.0
Average loan book 3,099.4 2,699.3
9.8% 7.5%
The yield measures the gross return on the loan book.
(iv) Return on average equity
Total return on average equity is calculated as the total profit after tax for
the previous 12 months as a percentage of average equity. Adjusted return on
average equity is calculated as the adjusted profit after tax for the previous
12 months as a percentage of average equity. Average equity is calculated as
the average of the monthly equity balances.
2023 Restated 2021 2020 2019
£million 2022 £million £million £million
£million
Total profit after tax 24.3 33.7 45.6 15.4 31.1
Less:
Loss/(profit) for the year from discontinued operations 2.1 (4.1) N/A N/A N/A
Exceptional items after tax 5.9 - - - -
Adjusted profit after tax 32.3 29.6 N/A N/A N/A
Opening equity 326.4 302.2 267.6 252.0 237.0
Closing equity 344.5 326.4 302.2 267.6 252.0
Average equity 334.9 313.4 287.0 261.1 242.9
Total return on average equity 7.3% 10.8% 15.9% 5.9% 12.8%
Adjusted return on average equity 9.6% 9.4% N/A N/A N/A
Return on average equity is a measure of the Group's ability to generate
profit from the equity available to it.
(v) Cost to income ratio
Statutory cost to income is calculated as total operating expenses for the
financial year as a percentage of operating income for the financial year.
Adjusted cost to income is calculated as adjusted operating expenses for the
financial year as a percentage of operating income for the financial year.
2023 2022 2021 2020 2019
£million £million £million £million £million
Total operating expenses 106.2 93.2 89.4 81.8 83.5
Less: Exceptional items (6.5) - - - -
Adjusted operating expenses 99.7 93.2 89.4 81.8 83.5
Operating income 184.7 169.6 148.9 144.5 148.4
Statutory cost to income ratio 57.5% 55.0% 60.0% 56.6% 56.3%
Adjusted cost to income ratio 54.0% 55.0% 60.0% 56.6% 56.3%
The cost to income ratio measures how efficiently the Group is utilising its
cost base to produce income.
(vi) Cost of risk
Cost of risk is calculated as the total of the net impairment charge on loans
and advances to customers and gains and losses on modification of financial
assets for the financial year as a percentage of the average loan book
2023 2022 2021 2020 2019
£million £million £million £million £million
Net impairment charge on loans and advances to customers 43.2 38.2 5.0 41.5 33.8
(Gains)/losses on modification of financial assets (0.3) (1.1) (1.5) 3.1 -
Total 42.9 37.1 3.5 44.5 33.8
Average loan book 3,099.4 2,699.3 2,240.5 2,197.8 2,041.3
Cost of risk 1.4% 1.4% 0.2% 2.0% 1.7%
The cost of risk measures how effective the Group has been in managing the
credit risk of its lending portfolios
(vii) Cost of funds
Cost of funds is calculated as the interest expense for the financial year
expressed as a percentage of average loan book
2023 2022
£million £million
Interest expense and similar charges 136.5 50.4
Average loan book 3,099.4 2,699.3
Cost of funds 4.4% 1.9%
The cost of funds measures the cost of money being lent to customers.
(viii) Funding ratio and loan to deposit ratio
The funding ratio is calculated as the total funding at the year-end divided
by total loans and advances to customers at the year-end. The loans to deposit
ratio is calculated as total loans and advances to customers at the year-end
divided by deposits from customers at the year end:
2023 Restated
£million 2022
£million
Deposits from customers 2,871.8 2,514.6
Borrowings under the Bank of England's liquidity support operations (including 395.1 392.8
accrued interest)
Tier 2 capital (including accrued interest) 93.1 51.1
Equity 344.5 326.4
Total funding 3,704.5 3,284.9
Total loans and advances to customers 3,315.3 2,919.5
Funding ratio 111.7% 112.5%
Loan to deposit ratio 115.4% 116.1%
The funding ratio and loan to deposit ratio measure the Group's excess of
funding that provides liquidity.
(ix) Profit before tax pre impairments
Profit before tax pre impairments is profit before tax, excluding impairment
charges and gains on modification of financial assets.
2023 2022
£million £million
Profit before income tax 36.1 39.0
Excluding: net impairment charge on loans and advances to customers 43.2 38.2
Excluding: gains on modification of financial assets (0.3) (1.1)
Profit before tax pre impairments 79.0 76.1
Exception items 6.5 -
Adjusted profit before tax pre impairments 85.5 76.1
Profit before tax pre impairments measures the operational performance of the
business.
(x) Tangible book value per share
Tangible book value per share is calculated as the total equity less
intangible assets divided by the number of shares in issue at the end of the
year.
2023 2022
£million £million
Total equity 344.5 326.4
Less: Intangible assets (5.9) (6.6)
Tangible book value 338.6 319.8
Number of shares in issue at the end of the year 19,017,795 18,691,434
Tangible book value per share £17.80 £17.11
Tangible book value per share is a measure of the Group's value per share.
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