REG - Tesco Personal FinTesco PLC - Final Results <Origin Href="QuoteRef">TSCO.L</Origin> - Part 5
12/04/2017 07:06
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PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
23. Property, Plant and Equipment
Group and Company Work in Progress Plant and Equipment Fixtures and Fittings Computer Hardware Freehold Buildings Leasehold Improvement Total
Cost £m £m £m £m £m £m £m
At 1 March 2016 4.4 3.0 14.2 129.8 28.2 22.7 202.3
Additions 1.9 - 2.2 6.5 - 1.8 12.4
Transfers (0.8) - 0.4 0.6 - - 0.2
Disposals - - (2.3) (8.0) - - (10.3)
At 28 February 2017 5.5 3.0 14.5 128.9 28.2 24.5 204.6
Accumulated depreciation
At 1 March 2016 - (3.0) (8.6) (100.1) (3.1) (8.6) (123.4)
Charge for the year - - (2.0) (8.5) (1.8) (4.5) (16.8)
Disposals - - 1.6 7.3 - - 8.9
At 28 February 2017 - (3.0) (9.0) (101.3) (4.9) (13.1) (131.3)
Net carrying value
At 28 February 2017 5.5 - 5.5 27.6 23.3 11.4 73.3
Cost
At 1 March 2015 4.3 3.0 13.0 126.6 28.2 19.9 195.0
Additions 1.8 - 1.4 1.8 - 2.8 7.8
Transfers (1.6) - 0.1 2.2 - - 0.7
Disposals (0.1) - (0.3) (0.8) - - (1.2)
At 29 February 2016 4.4 3.0 14.2 129.8 28.2 22.7 202.3
Accumulated depreciation
At 1 March 2015 - (3.0) (6.6) (90.4) (2.4) (6.2) (108.6)
Charge for the year - - (2.0) (10.5) (0.7) (2.4) (15.6)
Disposals - - - 0.8 - - 0.8
At 29 February 2016 - (3.0) (8.6) (100.1) (3.1) (8.6) (123.4)
Net carrying value
At 29 February 2016 4.4 - 5.6 29.7 25.1 14.1 78.9
Work in progress at 28 February 2017 relates to predominantly to the development of IT assets. Property, plant and
equipment balances are non-current.
During the year, the Group reassessed the useful life of certain of its tangible fixed assets, reducing the expected life
to a maximum of one year. This reduction in useful life reflects the impact of business restructuring commenced during the
first half of the financial year which has continued over the second half of 2016/17. The impact of this change has been to
increase the depreciation charge by £4.0m over 2016/17 in respect of property related costs arising due to the early exit
from the Group's office in central Edinburgh. As this represents a change in accounting estimate, no prior year adjustment
is required.
56
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
24. Deposits from Banks
Group and Company 2017 2016
£m £m
Deposits from banks 499.8 82.0
Current 99.8 82.0
Non-current 400.0 -
Deposits from banks include balances of £99.8m (2016: £82.0m) which have been sold under sale and repurchase agreements and
balances of £400.0m (2016: £nil) drawn under the Bank of England's Term Funding Scheme (TFS).
25. Deposits from Customers
Group and Company 2017 2016
£m £m
Deposits from Tesco Personal Finance Group companies 3.6 1.2
Retail deposits 8,463.1 7,397.3
Fair value hedge adjustment 0.1 -
8,466.8 7,398.5
Current 6,590.7 5,825.8
Non-current 1,876.1 1,572.7
Fair value hedge adjustments
Fair value hedge adjustments amounting to £0.1m (2016: £nil) are in respect of fixed rate Savings products. These
adjustments are largely offset by derivatives, which are used to manage interest rate risk and are designated as fair value
hedges within deposits from customers.
57
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
26. Debt Securities in Issue
Group Interest rate Par value £m Term (years) Maturity date 2017£m 2016£m
Fixed rate retail bond - issued 24 February 2011 5.2% 125.0 7.5 2018 129.2 132.3
RPI bond - issued 16 December 2011 1.0% 67.2 8 2019 67.2 65.7
Fixed rate retail bond - issued 21 May 2012 5.0% 200.0 8.5 2020 209.6 210.9
Floating rate AAA bond (A1) 1 1M LIBOR + 0.45% 150.0 5 2019 149.7 149.6
Floating rate AAA bond (A2) 2 1M LIBOR + 0.65% 350.0 7 2021 349.2 348.9
Floating rate AAA bond (A1) 3 1M LIBOR + 0.65% 300.0 5 2020 299.4 299.2
1,204.3 1,206.6
Company
Fixed rate retail bond - issued 24 February 2011 5.2% 125.0 7.5 2018 129.2 132.3
RPI bond - issued 16 December 2011 1.0% 65.7 8 2019 67.2 65.7
Fixed rate retail bond - issued 21 May 2012 5.0% 200.0 8.5 2020 209.6 210.9
406.0 408.9
1 This Bond was issued on 6 June 2014. The scheduled redemption date of this Bond is May 2017.
2 This Bond was issued on 6 June 2014. The scheduled redemption date of this Bond is May 2019.
3 This Bond was issued on 13 May 2015. The scheduled redemption date of this Bond is April 2018.
All Floating Rate Bonds were issued by Delamare Cards MTN Issuer plc and are listed on the Irish Stock Exchange. All retail
bonds are listed on the London Stock Exchange. All balances are classified as non-current at the year end with the
exception of £150.0m of the floating rate AAA bond (A1), which will be redeemed on its scheduled redemption date in May
2017.
58
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
27. Provisions for Liabilities and Charges
Group and Company Customer Redress Provision Insurance Provisions Restructuring Provision DilapidationsProvision Total
2017 £m £m £m £m £m
At beginning of year 51.1 4.3 - 2.8 58.2
Provided during the year 45.0 4.2 10.4 1.8 61.4
Utilised during the year (28.1) (4.3) (3.7) - (36.1)
At end of year 68.0 4.2 6.7 4.6 83.5
Customer redress provision - Payment protection insurance
Of the total customer redress provision balance at 28 February 2017, £63.8m (2016: £34.6m) has been provided for customer
redress in respect of potential customer complaints arising from historic sales of PPI.
In August 2016 the Financial Conduct Authority (FCA) issued an update to its initial proposals published in November 2015
and a further Consultation Paper (CP16/20, 'Rules and guidance on payment protection insurance complaints: feedback on
CP15/39 and further consultation'). This Paper confirmed the original proposal for a two year deadline for PPI claims
(ending June 2019), supported by an FCA led communications campaign. In March 2017, the FCA issued a Policy Statement
(PS17/3, 'Payment protection insurance complaints: feedback on CP16/20 and final rules and guidance') which confirmed a
deadline for PPI claims of August 2019. This revised end date represents a 16 month extension from the original
anticipated end date at the prior year end of April 2018.
The August 2016 FCA Consultation Paper (CP16/20) also consulted on rules and guidance on the handling of PPI complaints in
light of the Supreme Court's decision in Plevin v Paragon Personal Finance Limited ('Plevin'). The March 2017 Policy
Statement (PS17/3) confirms that both up-front commission arrangements and profit share arrangements should be considered
in the calculation of total commission for Plevin complaints.
The Group increased its PPI provision by £45.0m during the period to reflect:
· the impact on current claim volumes of the proposed extension to the time bar;
· an updated assessment of the current claim rate;
· the impact on the expected cost of redress from new rules proposed in the FCA paper regarding Plevin; and
· additional costs expected to be incurred in respect of the Group's contribution to the FCA's communications
campaign.
Although a significant degree of uncertainty remains with regard to the ultimate cost of settling PPI complaints, in
particular the volume of complaints arising from customers ahead of the confirmed deadline, the provision balance
represents Management's best estimate at the reporting date of that cost. The PPI provision will continue to be monitored
as trends in complaint volumes and levels of redress develop.
59
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
27. Provisions for Liabilities and Charges (continued)
This balance provides redress capacity, at current run rates, significantly beyond the FCA communicated time bar date of
August 2019. However, the run rate is anticipated to increase with the launch of the FCA communication campaign and the
implementation of the Plevin rules. Therefore, taking into account both of these factors, the provision held is considered
to be adequate.
The table below details for each key assumption, actual data to 28 February 2017, forecast assumptions used in assessing
the PPI provision adequacy and a sensitivity assessment demonstrating the impact on the provision of a variation in the
future experience.
Sensitivity
Assumption Cumulative actual Future expected Change in assumption Consequential change in provision
£m
Valid claims settled 108,524 45,028 +/- 1,000 complaints +/- 1.1
Average redress per valid claim £1,746 £1,094 +/- £100 +/- 4.5
Customer redress provision - Credit card protection (CCP)
At 29 February 2016, the Group held a provision in respect of customer redress relating to the historic sale of certain
cardholder protection products to Credit Card customers.
During the year, the Group utilised £3.9m of the brought forward provision and reduced the remaining CCP provision by £0.7m
to £nil at 28 February 2017 (2016: £4.6m), following the closure of the industry-wide scheme of arrangement on 18 March
2016.
All compensation amounts have now been issued to impacted customers.
Customer redress provision - Consumer credit act (CCA)
The Group holds a provision of £4.2m (2016: £11.9m) in respect of customer redress relating to instances where certain
requirements of the CCA for post contract documentation were not fully complied with.
In arriving at the provision required, which was increased during the year by £0.7m, the Group has considered the legal and
regulatory position with respect to these matters and has sought legal advice which it took into account when making its
judgement. The provision represents Management's best estimate at the reporting date of the cost of concluding the redress
programme for Loan and Credit Card customers, and in making the estimate Management have exercised judgement as to both the
timescale for completing the redress campaign and the final scope of any amounts payable.
Insurance provision
The insurance provision relates to insurance policy cancellation by customers. This balance is classified as current at the
year end.
Restructuring provision
The restructuring provision relates to restructuring costs arising from the Customer 2020 programme. Management expect to
utilise this provision over the period to 31 December 2018.
Dilapidations provision
The dilapidations provision relates to anticipated costs of restoring leased assets to their original condition.
Management expect that the provision will be utilised at the end of the lease terms, the longest of which is due to end in
2029.
60
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
28. Accruals and Deferred Income
Group and Company 2017 2016
£m £m
Amounts accrued to Tesco Group subsidiaries 10.4 8.0
Amounts accrued to Tesco Personal Finance Group Limited 0.6 0.7
Other accruals 91.8 107.8
Deferred income 12.3 11.7
115.1 128.2
All amounts are classified as current at the year end.
29. Other Liabilities
Group Company
2017 2016 2017 2016
£m £m £m £m
Accounts payable and sundry payables 119.5 117.5 119.3 117.7
Amounts owed to Tesco Group subsidiaries 11.4 10.9 11.4 10.9
Insurance payables 11.7 8.1 11.7 8.1
Taxation and social security 5.5 6.3 5.5 6.3
Amounts due to Tesco Personal Finance Group Limited subsidiaries 0.2 - 777.4 776.0
148.3 142.8 925.3 919.0
All amounts are classified as current at the year end.
30. Subordinated Liabilities and Notes
Group and Company 2017 2016
£m £m
Floating rate subordinated loans maturing 2030 190.0 190.0
Undated floating rate notes 45.0 45.0
235.0 235.0
Subordinated liabilities and notes comprise loan capital issued to Tesco Personal Finance Group Limited. This includes
£190.0m (2016: £190.0m) of subordinated loans maturing in 2030 and £45.0m (2016: £45.0m) of undated notes with no fixed
maturity date. All balances are classified as non-current at the year end.
Interest payable on the subordinated liabilities and notes is based on three month LIBOR plus a spread ranging from 60 to
220 basis points (2016: three month LIBOR plus a spread ranging from 60 to 220 basis points).
61
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
31. Share Capital and Share Premium Account
Group and Company 2017 2017 2016 2016
Number £m Number £m
Authorised
Ordinary shares of 10p each Unlimited Unlimited
Allotted, called up and fully paid
Ordinary shares of 10p each 1,219,900,000 122.0 1,219,900,000 122.0
2017 2016
£m £m
Share premium reserve 1,097.9 1,097.9
32. Other Reserves
Group Company
2017 2016 2017 2016
£m £m £m £m
Cash flow hedge reserve (0.6) (1.6) (0.6) (1.6)
Available-for-sale reserve 18.0 5.4 7.8 5.7
Share based payment reserve 27.0 23.3 27.0 23.3
44.4 27.1 34.2 27.4
Cash flow hedge reserve
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are
included in the cash flow hedge reserve. The gain or loss relating to the ineffective portion is recognised immediately in
the Consolidated Income Statement.
Available-for-sale reserve
Available-for-sale financial assets are initially recognised at fair value and measured subsequently at fair value with
gains and losses being recognised in the Consolidated Statement of Other Comprehensive Income (except for impairment losses
and foreign exchange gains and losses which are immediately recognised in the Consolidated Income Statement) until the
financial asset is derecognised.
Gains or losses in respect of the interest rate element of the fair value movement are subsequently recycled to the
Consolidated Income Statement where hedge accounting is in place.
The consolidated available-for-sale reserve also includes the Group's share of the available-for-sale reserve of its joint
venture, Tesco Underwriting Limited.
Share based payment reserve
The fair value of Tesco PLC equity-settled share options granted to employees of the Group is included in the share based
payment reserve.
62
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
33. Employee Benefit Liability
The Group made contributions in the year to a funded defined benefit scheme and a funded defined contribution scheme. Both
of these schemes are operated by Tesco Stores Limited.
Defined benefit plans
The Group made contributions in the year to a funded defined benefit scheme, operated by Tesco Stores Limited. The
principal pension plan is the Tesco PLC pension scheme, a funded defined benefit pension scheme in the UK, the assets of
which are held as a segregated fund and administered by the Trustee. The Career Average section of that Scheme ('Pension
Builder') was closed to new members and future accrual on 21 November 2015. As a result of the closure, all active members
of the Scheme became deferred members. Tesco Stores Limited has recognised the appropriate net liability of the Tesco PLC
pension scheme in accordance with IAS 19 'Employee Benefits'.
Defined contribution plans
A new defined contribution scheme was opened on 22 November 2015 and is open to all Group employees in the UK. As part of
Tesco PLC's consultation process leading up to the closure, it was agreed that all members of the defined benefit scheme
who remained employed in January 2016 would receive a one-off payment into the new defined contribution scheme equivalent
to one week's salary (capped at £500 per member).
Detailed disclosures, in line with the requirements of IAS 19, are included in the Tesco PLC 2017 annual report.
63
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
34. Risk Management
There are no differences in the manner in which risks are managed and measured between the Group and the Company.
Therefore, the explanations of the management, the control responsibilities and the measurement of risk described in this
section are those for the Group. The amounts included in this note are those for the Group unless otherwise stated.
Through its normal operations, the Group is exposed to a number of risks, the most significant of which are credit risk,
operational risk, liquidity and funding risk, market risk, insurance risk, residual price risk and legal and regulatory
compliance risk. The key risk management processes and tools are described in detail on pages 7 to 15 within the Strategic
Report.
Credit Risk
Types of credit risk
· Retail credit risk
Retail credit risk is the risk that a borrower will default on a debt or obligation by failing to make contractually
obligated payments, or that the Group will incur losses due to any other counterparty failing to meet their financial
obligations. Regular management reports are submitted to the Board and appropriate Committees.
Controls and risk mitigants
To minimise the potential for the Group to be exposed to levels of bad debt that are outside Risk Appetite, a robust
infrastructure of processes and systems has been established that cover the end to end retail credit risk customer life
cycle, the key components of which are outlined below:
Credit scoring: The quality of new lending is tightly controlled using appropriate credit scoring and associated rules.
Judgemental analysis is used for more complex cases.
Affordability: In being a responsible lender, the Group employs affordability models, including minimum free income
thresholds based on customers' income and outgoings, to confirm that they have the ability to repay the advances they are
seeking.
Valuations: Independent property valuations are undertaken at Mortgage inception. The Group's Mortgage assets are revalued
quarterly using a regional house price valuation index model.
Credit policies and guides: A suite of retail credit risk policies and supporting guides are maintained by the Credit Risk
function. These policies define the minimum requirements for the management of credit activities across the credit life
cycle. The guides also comprise specific product and customer related thresholds that in turn seek to ensure that the Group
is operating within agreed retail credit Risk Appetite parameters.
Monitoring and reporting: Management information is produced covering all lending portfolios which is tailored to meet the
requirements of different audiences within the overall governance framework. Key Risk Indicators (KRIs) with supporting
limits and tolerances allow the Group to track performance against Risk Appetite and identify any emerging trends that
could act as an early warning that performance could move outside approved Risk Appetite thresholds, thereby allowing
mitigating actions to be taken to address such trends.
64
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
34. Risk Management (continued)
· Wholesale credit risk
The Group does not operate in the mainstream commercial or corporate lending market. However, the Group is exposed to
wholesale credit risk primarily through Treasury activities, as a result of cash management, liquidity and market risk
management, with the inherent risk that these counterparties could fail to meet their obligations.
Controls and risk mitigants
To mitigate this risk a framework has been established that comprises defined country, counterparty, instrument types and
maturity profiles. The Group's defined Risk Appetite specifies the minimum investment grade ratings required of
counterparties. The framework also sets limits on the amounts that can be lent based on counterparty creditworthiness,
instrument type and remaining tenor.
The Group has a Wholesale Credit Risk Forum where current ratings and exposures are discussed on a monthly basis by members
from Treasury and the Market & Liquidity Risk team. Counterparty credit reviews and proposals for new limits are also
discussed at the Wholesale Credit Risk Forum as well as current market events and their possible impact on the Group. All
material limits are approved by the Chief Financial Officer within parameters set by the Board and any exceptions or
overrides to the policy must be explicitly agreed by the Chief Executive Officer and notified to the Board.
Credit risk exposures
The table below relates to credit risk exposures of both on and off balance sheet assets. This represents a worst case
scenario of credit risk exposure at the year end. For on balance sheet assets, the balances set out below are based on net
carrying amounts as reported in the Consolidated Statement of Financial Position.
2017 2016
Credit risk exposures relating to on balance sheet items £m £m
Cash and balances with central banks* 802.9 564.9
Loans and advances to customers 9,961.2 8,545.7
Derivative financial instruments 28.7 29.3
Investment securities:
- Available-for-sale 966.1 983.6
- Loans and receivables 34.1 34.1
Other assets* 299.1 277.3
Total credit risk exposures relating to on balance sheet items 12,092.1 10,434.9
Credit risk exposures relating to off balance sheet items
Customer lending commitments 12,132.0 11,866.8
Bank of England Funding for Lending Scheme (FLS) 270.0 389.0
Total credit risk exposures relating to off balance sheet items 12,402.0 12,255.8
Total credit risk exposures 24,494.1 22,690.7
* On a Company basis, cash and balances with central banks is £694.5m (2016: £506.6m) and other assets is £387.2m (2016: £315.5m).
As shown above, 82.4% of the total maximum exposure to on balance sheet assets for the Group is derived from loans and
advances to customers (2016: 81.9%) and 8.0% represents investments in financial assets classified as available-for-sale
(2016: 9.4%).
65
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
34. Risk Management (continued)
· Credit risk: Collateral
The Group is exposed to potential bad debts as a result of Mortgage lending, with the inherent risk that customers default
on their obligations.
Controls and risk mitigants
To mitigate this risk all Mortgages are secured by a first charge over the property being purchased or remortgaged, to
safeguard the Group's assets in the event of a forced property sale situation. Valuation of the property is assessed as
part of the application process by a RICS (the Royal Institute of Chartered Surveyors) certified valuer from the Group's
approved panel of valuers or, when a customer decides to re-mortgage with the Group, by an automated valuation model.
The Group revalues its collateral on a quarterly basis using a regional house price valuation index. It is not normal
practice to obtain additional third party revaluation of collateral unless further lending is being considered or the
property has been repossessed.
The table below details the value of property collateral held against the Group's Mortgage portfolio.
Collateral held against Mortgage portfolio 2017 2016
£m £m
Exposure* 2,155.3 1,669.7
Collateral 4,374.7 3,289.7
Cover 203.0% 197.0%
* The Mortgage balances above represent the credit risk inherent in the Mortgage products and excludes accrued interest and fair value adjustments.
· Credit risk: Concentration risk
The Group is potentially exposed to this risk by becoming concentrated in certain geographic areas or product profiles e.g.
a disproportionate level of high Loan to Value (LTV) Mortgages. Such concentrations could produce unacceptable bad debts in
some adverse but plausible situations.
Controls and risk mitigants
The Group mitigates these potential concentration risks by establishing appropriate Risk Appetite limits and trigger
thresholds that are regularly monitored and reported to the appropriate Senior Management team and risk committees.
66
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
34. Risk Management (continued)
Concentration profiles
The following tables provide concentration profiles in terms of the LTV profile for the Mortgage portfolio; geographic
distribution of the Group's exposures; analysis of material asset class by industry type and credit exposure by impairment
status across the different exposure class.
· Credit risk: Mortgage portfolio - LTV distribution profile
Loans are originated on an income verified basis over a range of fixed and tracker products. All loans are repaid on a
capital and interest basis, where the loan is repaid over the agreed term of the loan.
The table below provides the LTV distribution profile for the Group's Mortgage portfolio by weighted average balance. The
overall average LTV for the portfolio is 49.3% (2016: 50.8%) which is well within agreed Risk Appetite parameters.
2017 2016
£m £m
Less than 50% 671.7 494.7
50% to 60% 405.3 266.9
60% to 70% 404.9 371.2
70% to 80% 311.6 327.2
80% to 90% 266.9 152.9
90% to 100% 92.8 54.7
Greater than 100% 2.1 2.1
Total* 2,155.3 1,669.7
* The Mortgage balance above represents the credit risk inherent in the Mortgage products and excludes accrued interest or fair value adjustments.
· Credit risk: Asset class geographical distribution profile
The Group is primarily focused on providing financial services and products to UK personal customers.
The table below provides the geographical distribution of the Group's total credit risk exposures. For on balance sheet
assets, the balances set out below are based on net carrying amounts as reported in the Consolidated Statement of Financial
Position.
2017 2016
£m £m
United Kingdom 24,125.9 22,342.7
Europe (excluding United Kingdom) 299.4 302.5
Other 68.8 45.5
Total 24,494.1 22,690.7
67
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
34. Risk Management (continued)
· Credit risk: Analysis by industry type
The table below represents the distribution of exposures by industry type. The Group is primarily focused on providing
financial services and products to personal customers in the UK, although it also has exposure to wholesale counterparties
as detailed below. For on balance sheet assets, the balances set out below are based on net carrying amounts as reported
in the Consolidated Statement of Financial Position.
2017 2016
£m £m
Financial institutions 809.2 670.7
Government 1,492.6 1,580.8
Individuals 22,113.6 20,411.7
Wholesale and retail trade 78.7 27.5
Total 24,494.1 22,690.7
· Credit risk: Asset quality
Ineffective management and controls over the emerging asset quality of the Group's lending portfolios could expose the
Group to unacceptable levels of bad debt.
Controls and risk mitigants
The Group's asset quality is reflected through the level of its impairment by lending type. Asset quality profiles are
regularly monitored and reported to the appropriate Senior Management team and risk committees.
68
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
34. Risk Management (continued)
The table below presents an analysis of credit exposure by impairment status across the different exposure classes. The
table predominantly relates to Banking assets; the retail instalment lending applies to credit agreements in the Insurance
business. The balances set out below are based on gross loans and advances as provided in note 14.
Credit quality of gross loans and advances2017 Retail unsecured lending Retailmortgage lending Retail instalment lending Total
£m £m £m £m
Past due and impaired
Less than 90 days past due 32.4 - - 32.4
90-179 days past due 47.9 - - 47.9
180 days plus past due 99.3 - - 99.3
Past due but not impaired
0-29 days past due 47.8 0.6 0.2 48.6
30-59 days past due 15.5 - - 15.5
60-89 days past due 9.9 - - 9.9
Neither past due nor impaired
Low risk * 7,439.6 2,153.8 140.1 9,733.5
High risk ** 152.1 15.8 - 167.9
7,844.5 2,170.2 140.3 10,155.0
Credit quality of gross loans and advances2016 Retail unsecured lending Retail mortgage lending Retail instalment lending Total
£m £m £m £m
Past due and impaired
Less than 90 days past due 30.4 - - 30.4
90-179 days past due 41.0 - - 41.0
180 days plus past due 81.7 - - 81.7
Past due but not impaired
0-29 days past due 38.6 0.8 1.1 40.5
30-59 days past due 12.1 - 0.1 12.2
60-89 days past due 8.7 - - 8.7
Over 90 days past due - - 0.3 0.3
Neither past due nor impaired
Low risk * 6,570.0 1,672.9 145.6 8,388.5
High risk ** 86.3 10.0 - 96.3
6,868.8 1,683.7 147.1 8,699.6
* Low risk is defined as an asset with a probability of default of less than 10%.
** High risk is defined as an asset with a probability of default of 10% or more.
All other financial assets are deemed to be at low risk of default.
69
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
34. Risk Management (continued)
· Credit risk: Forbearance
The Group could be exposed to unacceptable levels of bad debt and also suffer reputational damage if it did not provide
adequate support to customers who are experiencing financial difficulties.
Controls and risk mitigants
The Group has well defined forbearance policies and processes. Forbearance is relief granted by a lender to assist
customers in financial difficulty, through arrangements which temporarily allow the customer to pay an amount other than
the contractual amounts due. These temporary arrangements may be initiated by the customer or the Group where financial
distress would prevent repayment within the original terms and conditions of the contract. The main aim of forbearance is
to support the customers in returning to a position where they are able to meet their contractual obligations.
A number of forbearance options are made available to customers by the Group. These routinely, but not exclusively, include
the following:
· Arrangements to repay arrears over a period of time, by making payments above the contractual amount, that ensure
the loan is repaid within the original repayment term.
· Short term concessions, where the borrower is allowed to make reduced repayments (or in exceptional circumstances,
no repayments) on a temporary basis to assist with short term financial hardship.
· For secured products, it may also be acceptable to allow the customer to clear the arrears over an extended period
of time, provided the payments remain affordable.
The Group has adopted the definition of forbearance in the European Banking Authority's (EBA) final draft Implementing
Technical Standards (ITS) of July 2014. The Group reports all accounts meeting this definition, providing for them
appropriately.
The table below details the values of secured and unsecured advances that are subject to forbearance programmes, in
accordance with the EBA definition.
Gross Loans and Advances subject to Forbearance Programmes Forbearance programmes as a proportion of total Loans and Advances by category Proportion of Forbearance Programmes covered by impairment provision
2017£m 2016£m 2017% 2016% 2017% 2016%
Credit Cards UK 70.4 63.1 1.8 1.7 60.0 58.8
Credit Cards Euro 1.1 0.9 2.9 2.8 40.0 31.1
Credit Cards commercial 0.1 0.1 4.3 3.9 84.7 79.6
Loans 38.2 30.3 1.0 1.0 62.9 58.6
Mortgages 4.3 2.3 0.2 0.1 0.1 -
70
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
34. Risk Management (continued)
· Operational risk
Operational risk is the risk of potential error, loss, harm or failure caused by ineffective or inadequately defined
processes, system failure, improper conduct, human error or from external events. The Group aims to effectively manage
operational risks within defined Risk Appetite limits. The Group is subject to the Standardised Approach (TSA) method to
calculate Pillar I Operational Risk capital, as outlined in Capital Requirement Regulations (CRR) published on 27 June 2013
in the Official Journal of the European Union.
As stated in the Strategic Report on page 3, in November 2016, Tesco Bank's debit cards were the subject of an online
fraudulent attack. The Group's priority throughout was to ensure customers' accounts were protected and that it
communicated with customers immediately and transparently, reassuring customers that there was no data loss or breach of
systems. The Group has undertaken an independent review of the issue, has undertaken immediate remedial action and
continues to work closely with the authorities and regulator on this incident.
Controls and risk mitigants
The Bank's risks are assessed utilising a risk management framework methodology which is aligned to the three lines of
defence model.
The Chief Risk Officer and the Operational Risk Director, together with a dedicated Operational Risk team, are responsible
for:
· developing and maintaining the operational risk framework;
· working with relevant business areas to make sure that first line responsibilities are understood and that those
responsibilities should be executed within the framework;
· supporting relevant business areas to embed policies and frameworks and instil a positive risk management culture;
and
· independently monitoring, assessing and reporting on operational risk profiles and losses.
The Operational Risk function maintains a suite of policies defining the minimum requirements for the management of
Operational Risk and Financial Crime.
Business units and functions assess their operational risks on an ongoing basis via a prescribed Risk and Control Self
Assessment (RCSA) process and Operational Risk Scenario Analysis (ORSA). The RCSA analysis is reviewed and updated
quarterly by first line business areas to reflect changes to the risk and control environment arising from changes in
products, processes and systems. The RCSA outputs are reported to relevant governance bodies. This is supplemented further
by an Event Management process and monthly reporting of the Operational Risk profile to the Executive Risk Committee. The
ORSA builds on RCSA and Event Management to identify the forward looking risk profile and the results are used to inform
the Board's decision on any additional requirement for Operational Risk Capital under Pillar II.
The Operational Risk Committee provides oversight of the Group's operational risk profile and provides regular reports and
recommendations to the appropriate governance bodies.
· Liquidity and funding risk
Liquidity risk is the risk that the Group is not able to meet its obligations as they fall due. This includes the risk
that a given security cannot be traded quickly enough in the market to prevent a loss if a credit rating falls. Funding
risk is the risk that the Group does not have sufficiently stable and diverse sources of funding.
The Group operates within a Liquidity Risk Management Policy Framework (LRMP) to ensure that sufficient funds are available
at all times to meet demands from depositors; to fund agreed advances; to meet other commitments as and when they fall due;
and to ensure the Board's Risk Appetite is met.
71
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
34. Risk Management (continued)
Controls and risk mitigants
Liquidity and funding risk is assessed through the Individual Liquidity Adequacy Assessment Process (ILAAP) on at least an
annual basis. The ILAAP process involves detailed consideration of the following:
· identification of sources of liquidity risk;
· quantification of those risks through stress testing;
· consideration of management processes and controls to minimise the risk;
· assessment of the type and quality of liquid asset holdings to mitigate the risk; and
· consideration of the levels of contingent funding required to mitigate the risk.
The Group sets formal limits within the LRMP to maintain liquidity risk exposures within the liquidity Risk Appetite set by
the Board. The key liquidity and funding measures monitored on a regular basis are; the internal liquidity requirement;
liquidity coverage ratio; the net stable funding ratio; the loan to deposit ratio; the encumbrance ratio; the wholesale
funding ratio; the annual wholesale re-financing amount; and the minimum unencumbered assets.
The Group measures and manages liquidity adequacy in line with the above metrics on a regular basis and maintains a
conservative liquidity and funding profile to confirm that it is able to meet its financial obligations under normal, and
stressed, market conditions.
The Group monitors and reports on the composition of its funding base against defined thresholds to avoid funding source
and maturity concentration risks.
The Group prepares both short term and long term forecasts to assess liquidity requirements and takes into account factors
such as Credit Card payment cycles, investment maturities, customer deposit patterns, and wholesale funding (including FLS
and TFS) maturities. These reports support daily liquidity management and are reviewed daily by Senior Management along
with early warning indicators.
Stress testing of current and forecast financial positions is conducted to inform the Group of required liquidity
resources. Reverse stress testing is conducted to inform the Group of the circumstances that would result in liquidity
resources being exhausted. Liquidity stress tests are presented to the Liquidity Management Forum and Asset and Liability
Management Committee (ALCo) on a regular basis to provide evidence that sufficient liquidity is held to meet financial
obligations in a stress.
The Treasury Director is responsible for formulating, and obtaining Board approval for, an annual funding plan as part of
the overall business planning process. The Group is predominantly funded by its retail deposit base which reduces reliance
on wholesale funding and, in particular, results in minimal short-term wholesale funding.
Expected maturity dates do not differ significantly from the contract dates, except for floating rate bonds where the
expected redemption date has been provided in note 26 and deposits from customers which are all retail in nature. These
deposits are repayable on demand on a contractual basis. The Group continuously monitors retail deposit activity so that it
can reasonably predict expected maturity flows. These instruments form a stable funding base for the Group's operations
because of the broad customer base and the behaviours exhibited, with historical trends showing that these deposits tend to
be very stable, with actual maturities being significantly longer than the contracted maturity.
During the year the Group accessed the Bank of England's FLS and TFS to support strong lending growth in a cost effective
manner.
72
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
34. Risk Management (continued)
The table below shows the Group's primary funding sources.
Primary funding sources 2017 2016
£m £m
On balance sheet
Deposits from banks 499.8 82.0
Deposits from customers 8,466.8 7,398.5
Subordinated liabilities and notes 235.0 235.0
Debt securities in issue 1,204.3 1,206.6
Total on balance sheet funding 10,405.9 8,922.1
Off balance sheet
Treasury bills drawn under FLS (net of repurchase agreements)* 170.0 338.0
Total off balance sheet funding 170.0 338.0
*FLS drawdowns of £270.0m (2016: £389.0m) are shown net of Treasury bills used as collateral in repurchase agreements of £100.0m (2016: £51.0m).
73
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
34. Risk Management (continued)
The tables below show cash flows payable up to a period of 20 years on an undiscounted basis. These differ from the
Statement of Financial Position values due to the effects of discounting on certain Statement of Financial Position items
and due to the inclusion of contractual
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