TIDM93RD TIDMTTM
RNS Number : 9977T
Co-Operative Bank Finance PLC (The)
28 July 2022
Nick Slape (CEO) and Louise Britnell (CFO) will host a video conference on 28 July 2022 at
9am (UK time) to present the interim results for the six months ended 30 June 2022 and a Q&A
session.
To access the call please visit https://www.co-operativebank.co.uk/about-us/investor-relations
/
Additional materials are also available at this address.
BASIS OF PRESENTATION
The Co-operative Bank Holdings Limited is the immediate parent company of The Co-operative
Bank Finance p.l.c. and the ultimate parent company of The Co-operative Bank p.l.c. In the
following pages the term 'Group' refers to The Co-operative Bank Holdings Limited and its
subsidiaries. The term 'Finance Group' refers to The Co-operative Bank Finance p.l.c. and
its subsidiaries. The term 'Bank' refers to The Co-operative Bank p.l.c. and its subsidiaries
which are consolidated within the Finance Group and then ultimately the Group. Unless otherwise
stated, information presented for the Group equally applies to the Bank and the Finance Group.
Underlying basis: The statutory results are adjusted to remove certain items that do not
promote an understanding of historical or future trends of earnings or cash flows, which therefore
allows a more meaningful comparison of the Group's underlying performance.
Alternative performance measures: The Group uses a number of alternative performance measures,
including underlying profit or loss, in the discussion of its business performance and financial
position.
2022 INTERIM FINANCIAL REPORT
The Co-operative Bank ('the Bank') is pleased to provide an
update on its performance for the six months ended 30 June
2022:
-- Profit before tax of GBP61.9m and underlying profit of
GBP63.6m; significant increase on 1H 21 (underlying profit
GBP12.9m)
-- Balance sheet remains stable with a low-risk portfolio; net
impairment release reflects robust credit performance
-- Reinforced capital position; compliant with implied end-state
MREL requirements including CRDIV buffers; no further capital
issuance planned for this year
-- Launched our sixth customer-led ethical policy; c50,000
customers have helped shape the new pillars which will define how
we conduct our business - Planet, People and Community
-- Guidance upgraded; reflecting a strong first half performance
and an improved outlook for the remainder of the year
Nick Slape, Chief Executive Officer, said:
"We have made significant progress in the delivery of our
strategy in the first half of 2022. The statutory profit before tax
of GBP61.9m and underlying profit before tax of GBP63.6m reflect
sustained quarter-on-quarter growth. These results are better than
anticipated at the start of the year and therefore, looking ahead,
we have upgraded our outlook for 2022 whilst increasing the
investment to be made available for customer service and
simplification initiatives. Our low-risk balance sheet, along with
the recent successful capital issuance, support our
customer-focussed goals to grow the Bank from an efficient and
resilient foundation.
While the economic outlook remains uncertain as we wait to see
the full impact of higher inflation and cost of living pressures,
we remain committed to helping customers and colleagues during
these challenging times and services are available to anyone
requiring support. We made the decision in the first quarter to
make a one-off payment to lower-paid colleagues, and we have also
committed that from September we will increase the annual salaries
we pay to colleagues by GBP1,000 (full time equivalent). This
change in base pay will apply to approximately 95% of colleagues
across the Bank, excluding those already on the highest
salaries.
Earlier this year we launched our sixth customer-led ethical
policy which has confirmed the alignment between our strategy and
what our customers expect of The Co-operative Bank. I was delighted
that we were again recognised as the number one high street bank
for ESG in the UK by Sustainalytics and I would like to take the
opportunity to thank all our customers and colleagues for
continuing to support us to deliver the important goals we
share."
FINANCIAL PERFORMANCE UPDATE
INCOME STATEMENT (GBPm)
6 months ended 30 June
------------------------
2022 2021
Net interest income 208.2 149.4
Other operating income 21.4 18.6
---------------------------------- ----------- -----------
Total income 229.6 168.0
Operating expenditure (175.1) (162.3)
Impairment 2.8 0.1
Non-operating income 4.6 15.6
---------------------------------- ----------- -----------
Profit before tax 61.9 21.4
Taxation (33.5) 23.5
---------------------------------- ----------- -----------
Profit after tax 28.4 44.9
---------------------------------- ----------- -----------
Adjustments to profit before tax
Exceptional project expenditure 5.5 9.7
Other exceptional (gains) (3.8) (18.2)
---------------------------------- ----------- -----------
Underlying profit before tax 63.6 12.9
---------------------------------- ----------- -----------
Key ratios:
Net interest margin (bps) (1) 151 122
Adjusted RoTE (%) (2) 13.6 3.0
Cost:income ratio (%) (3) 74.8 88.4
Asset quality ratio (bps) (4) (2.7) (0.1)
---------------------------------- ----------- -----------
1. Annualised net interest income over average interest earning
assets
2. Underlying profit minus current tax over CET1 resources
3. Total statutory expenditure over total statutory income
4. Annualised impairment (credit)/charge over average customer
assets
Profit before tax of GBP61.9m and underlying profit of
GBP63.6m
Total income, which includes net interest income and other
operating income, has increased by 37% in comparison to the six
months ended 30 June 2021 to GBP229.6m (1H 21: GBP168.0m).
Net interest income has increased by 39% to GBP208.2m (1H 21:
GBP149.4m) and net interest margin (NIM) has increased by 29 basis
points (bps) from 122bps to 151bps, reflecting higher mortgage
balances at improved margins. This is supported by improving
deposit margins following increases in the base rate to 125bps. As
a result, we have increased our expectations for the full year to
c.155bps.
During the period, operating expenditure has increased by 8% to
GBP175.1m (1H 21: GBP162.3m). Staff costs have increased largely
due to the phasing of performance-related pay being made earlier
than the prior period and actions taken by the Bank to support
colleagues with the rising cost of living. Non-staff costs have
increased following the impact of one-off gains in 1H 21 relating
to property costs, lower PPI releases and an increase in customer
fraud costs in 1H 22, partially offset by a reduction in
depreciation.
Project costs have increased to GBP16.5m (1H 21: GBP13.3m) which
reflects the current stage of our transformation as we lay the
foundations for the rest of the programme. Our statutory
cost:income ratio has improved in the period to 74.8% compared to
88.4%, due to the actions taken to grow income outweighing the
acceleration of the transformation spend. In light of our overall
financial performance we are increasing our investment spend in
people and IT infrastructure.
Net impairment credit of GBP2.8m (1H 21: GBP0.1m credit)
reflects the low level of defaults across the Bank's assets and a
reduction in Platform secured coverage to 7.3bps from 10bps. The
reduction in coverage reflects the ongoing monitoring of customer
arrears data in the post-pandemic period following the additional
provisions that were introduced in 2020, and includes the net
impact of COVID-19 provision release and uplift for cost of living
pressures.
We have reported a GBP4.6m non-operating exceptional gain (1H
21: GBP15.6m) which includes the profit on sale of a small legacy
loan book in the first quarter of the year, as well as the
revaluation of Visa shares.
Income tax charge of GBP33.5m
The income statement tax charge of GBP33.5m reflects a reduction
in the value of the Bank's deferred tax assets due to a decrease in
the banking surcharge from 8% to 3% which was enacted in the first
quarter of the year and is capital neutral. The impact has been
dampened by the recognition of further losses to shelter future
taxable profits.
SUMMARY BALANCE SHEET (GBPm)
Core
---------------------------
30 June 2022 Retail SME Total Legacy & central items Group
-------------- -------- ------- -------- ---------------------- --------
Assets 19,771.5 392.6 20,164.1 8,890.6 29,054.7
Liabilities 17,064.9 3,438.0 20,502.9 6,818.9 27,321.8
-------------- -------- ------- -------- ---------------------- --------
Core
---------------------------
31 December 2021 Retail SME Total Legacy & central items Group
----------------- -------- ------- -------- ---------------------- --------
Assets 19,756.0 441.7 20,197.7 9,125.6 29,323.3
Liabilities 17,604.4 3,461.0 21,065.4 6,506.0 27,571.4
----------------- -------- ------- -------- ---------------------- --------
Balance sheet remains stable with a low-risk portfolio
Total assets have reduced by 1% compared with 31 December 2021
with legacy assets reducing by 3% to GBP8.9bn. Retail secured
balances have increased slightly in the period to GBP19.5bn as we
have actively managed new business volumes to preserve Bank
margins. The mortgage pipeline is at c.GBP1.1bn, reflecting more
normalised, pre-pandemic levels.
Total liabilities have reduced by 1% to GBP27.3bn over the
period (FY 21: GBP27.6bn). Customer deposit balances across both
retail and SME segments have reduced to GBP20.5bn (FY 21:
GBP21.1bn), following some marginal unwind of excess balances built
up over the pandemic. The Bank maintains a strong LCR position of
252.9%.
The asset quality ratio (AQR) measures the level of impairment
charge compared to the size of the relevant portfolio. AQR in total
across retail, SME and legacy customer lending remains low,
reflecting the Bank's low-risk lending profile. AQR for the Bank as
a whole as at 30 June 2022 reflects a release of 2.7bps (1H 21:
nil; FY 21: charge of 1bp).The average mortgage completion
loan-to-value (LTV) remains low at 55.2% (FY 21 56.8%). Accounts
that are greater than three months in arrears represented 0.14% of
total accounts as at 30 June 2022 (FY 21 0.13%).
Reinforced capital position
Total MREL resources have grown by GBP245m, predominantly due to
the successful GBP250m MREL issuance under our inaugural Green,
Social and Sustainability Framework, which completed in April 2022.
Based on an implied end-state requirement (using the 1H 22 reported
balance sheet) of 29.6% including CRDIV buffers, we have surplus
MREL resources and therefore do not anticipate needing to issue
further capital during the remainder of 2022 in order to meet
end-state requirements when they come into effect on 1 January
2023. Until that point, we also have surplus resources to MREL plus
total buffers whilst transitional requirements apply.
This highlights the significant progress made to reinforce our
capital position and moves towards our commitment to restoring full
buffers before the end of 2023.
The CET1 ratio has reduced from 20.7% to 18.9% (driven by the
impact of regulatory adjustments for PS11/20 and software
intangibles) and remains well above the regulatory minimum of
12.3%. Organic CET1 ratio generation in 1H 22 totals 190bps,
including 80bps in 2Q, before the impact of the regulatory
adjustments, reflecting that profit generation has outweighed
balance sheet growth during the period.
Risk-weighted assets (RWAs) totalled GBP4.8bn (FY 21: GBP4.4bn).
With a stable balance sheet the majority of the movement is a
result of the impact of regulatory adjustments for PS11/20.
BUSINESS PERFORMANCE UPDATE
Launched our sixth customer-led ethical policy
Towards the end of 2021 we asked our customers to tell us about
the ethical issues that were important to them, and how we could
help drive positive social and environmental change. In our latest
value and ethics poll, 83% told us that our ethical policy is why
they choose to bank with us. In June, we were delighted to publish
an update to our ethical policy which was shaped by c.50,000
customer responses. Our customer-led ethical policy has been in
place for 30 years and the sixth iteration of this policy has been
divided into three pillars:
-- Planet; we have remained committed to tackling the climate
crisis over the past 30 years, and actively continue to do so;
-- People; we are committed to acting in a way that helps
individuals to live freely, equitably, and safely; and
-- Community; we are committed to being a good local, corporate,
and world citizen, working to improve all communities.
The new policy has a consistent structure throughout which
highlights, under each of the above core pillars, how we will embed
these principles into what we do and how we conduct our
business.
You can learn more about the refreshed ethical policy on our
website by following the link below:
https://www.co-operativebank.co.uk/values-and-ethics/
Delivering our strategy
Last year we refreshed and extended our strategy to cover a
period from 2022 through to 2026. The refresh set out the ways in
which we will continue to build the future of the Bank to ensure it
remains as a thriving, ethical bank at the heart of its community,
right where it started 150 years ago. We are currently in the first
phase of our refreshed strategy, 'growth and efficiency'.
During the first half of the year, we have made progress on the
refreshed strategic plan (the Plan) and have already launched a new
savings product on the Bank's mainframe for the first time in seven
years. This product launch is enabled by the simplification
programme, which is designed to simplify and transform our savings
and mortgage systems. Our ESG credentials are highlighted by the
launch of the Green, Social and Sustainability (GSS) Financing
Framework and our new ethical policy as referred to earlier. Our
adjusted return on tangible equity (RoTE) of 13.6% is tracking
ahead of our 2022 commitment of 8%.
Following operational challenges at the start of the year, we
have now addressed these through a number of key measures. These
measures include recruitment of more colleagues into our contact
centres as well as working to deliver digital journeys. Our service
levels are now back on track with a substantial improvement in our
'average speed to answer' (ASA), the quickest answer times for 12
months.
The mortgage and savings platform simplification activity is
complex for the Bank but it is important that we deliver a safe and
successful migration of customers to the new platform. As a result,
further work is needed to achieve those goals, with the mortgage
platform integration now expected to complete in 2023, later than
initially planned. The savings platform simplification is expected
to be delivered this year, while the mortgage servicing in-sourcing
is well progressed. The completion of this programme will mean a
reduction to the Group's operational risk profile and significant
improvements in customer experience and diversification of product
proposition.
BOARD MATTERS
The Board and its committees have focussed on many key matters
in the period. These included, amongst others:
-- Reviewing, challenging and approving the Bank's customer-led
ethical policy, refreshed following customer feedback to focus on
the three pillars of planet, people and community;
-- Overseeing the Bank's approach to the ongoing support of
co-operatives, the continued progress on our values and ethics-led
ESG commitments and ensuring the risks from climate change are
properly considered and incorporated into all areas of the
business;
-- Approving the decision to issue a claim seeking a judicial
review of a Financial Ombudsman Service ('FOS') jurisdiction
decision as being inconsistent with the time-barring rules of the
Financial Conduct Authority Dispute Resolution handbook in relation
to a complaint from a mortgage customer. The hearing of the
judicial review claim took place on 15 June 2022. The judgement was
published on 27 July 2022 and found in favour of the FOS. The Board
remains satisfied that these historical variations were applied
fairly and in accordance with the terms and conditions of the
mortgage contract;
-- The issuance in March 2022 of GBP250m of MREL-qualifying
funds, the inaugural issuance under the Bank's Green, Social and
Sustainability Financing Framework;
-- The approach to setting employee remuneration and the payment
of variable pay in March 2022 by reviewing delivery of the 2021
balanced scorecard;
-- The regular reforecasting of annual financial performance
against the goals set out in the 2022-26 strategic and financial
plan, approved in the third quarter of 2021, and the impact on the
longer-term financial and capital plans, including future capital
issuance plans;
-- The approval of the 2021 Annual Report and Accounts in
February 2022 and the first quarter results in May 2022;
-- The regulatory agenda including the review and approval of
the Bank's internal capital adequacy assessment process (ICAAP),
the internal liquidity adequacy assessment process (ILAAP) and
operational resilience self-assessment;
-- Continually reviewing ways to improve the customer
experience, including steps taken to reduce the average speed to
answer customer calls and customer complaints, and to combat fraud
and reduce the risk for customers, for example becoming a member of
a not-for-profit company limited by guarantee seeking to stop scams
at source via an industry-led initiative to prevent legitimate
services and platforms being used to facilitate criminal
activity;
-- Overseeing the remediation of ageing IT infrastructure and software; and
-- The Board's ambitious transformation plans to simplify its
mortgage and savings platforms and bring mortgage servicing
operations in-house.
OUTLOOK
We have made substantial progress in the first half of 2022 with
ongoing profitability and through strengthening of the Bank's
capital position with a further capital issuance. Whilst there
remains intense competition in the mortgage market and tightening
of margins, the base rate rises have supported an improvement in
deposit margins.
As a result of the performance to-date and the improved
confidence in the remainder of the year, the Bank has updated its
financial outlook for 2022:
-- Bank net interest margin has been upgraded to c.155bps,
reflecting higher Bank margins following the base rate improvements
but with the expectation of continued lower mortgage margins;
-- We have taken the decision to increase our total statutory
costs guidance of approximately GBP350m to c.GBP360m as we look to
further invest in customer service and simplification;
-- We continue to observe a low level of defaults on our
low-risk portfolio and have upgraded our AQR guidance to be less
than 2bps;
-- CET1 ratio has improved following better than expected net
income performance and lower RWAs. CET1 ratio guidance has been
upgraded to c.19%;
-- Customer assets expectations remain at c.GBP22bn in line with
original guidance with growth in line with market growth more
widely; and
-- Higher income and strong cost management has enabled us to
upgrade the adjusted return on tangible equity of approximately 8%
to c.13% as higher profitability and improved performance drives
further shareholder value.
Although we have performed well so far this year, there is still
a lot to do as we now look towards the second half of 2022. Despite
delays to the mortgage re-platforming, we remain confident that we
will accomplish the multi-year strategic goals embedded within the
first phase of our strategic plan to deliver a more efficient and
resilient Bank whilst targeting growth and diversification of
revenue streams.
SEGMENTAL PROFIT/(LOSS) (GBPm)
Further information is provided later in the report in note
3.
Six months ended 30 June 2022 Core Legacy & central items
Retail SME Total Unallocated Group
Net interest income/(expense) 183.6 28.8 212.4 (4.2) - 208.2
Other operating income 12.1 9.0 21.1 0.3 - 21.4
------------------------------------------ ------- ------ ------- ---------------------- ----------- -------
Operating income/(expense) 195.7 37.8 233.5 (3.9) - 229.6
Operating expenses (136.7) (30.0) (166.7) (2.1) (6.3) (175.1)
Net credit impairment releases/(charges) 1.5 (0.8) 0.7 2.1 - 2.8
Non-operating income - - - - 4.6 4.6
------------------------------------------ ------- ------ ------- ---------------------- ----------- -------
Profit/(loss) before tax 60.5 7.0 67.5 (3.9) (1.7) 61.9
------------------------------------------ ------- ------ ------- ---------------------- ----------- -------
Six months ended 30 June 2021 Core Legacy & central items
Re-presented
Retail SME Total Unallocated Group
Net interest income/(expense) 131.2 22.4 153.6 (4.2) - 149.4
Other operating income 10.6 8.0 18.6 - - 18.6
------------------------------------------ ------- ------ ------- ---------------------- ----------- -------
Operating income/(expense) 141.8 30.4 172.2 (4.2) - 168.0
Operating expenses (126.5) (26.5) (153.0) (2.2) (7.1) (162.3)
Net credit impairment releases/(charges) 2.0 (0.9) 1.1 (1.0) - 0.1
Non-operating income - - - - 15.6 15.6
------------------------------------------ ------- ------ ------- ---------------------- ----------- -------
Profit/(loss) before tax 17.3 3.0 20.3 (7.4) 8.5 21.4
------------------------------------------ ------- ------ ------- ---------------------- ----------- -------
SELECTED KEY PERFORMANCE INDICATORS
% (unless otherwise stated) 1H 22 2021 Change
CET1 ratio 18.9 20.7 (1.8)
Total capital ratio 23.0 25.4 (2.4)
Risk-weighted assets (GBPm) 4,799 4,373 426
Leverage ratio (PRA)(1) 3.9 3.8 0.1
Liquidity coverage ratio(2) 252.9 205.3 47.6
Loan to deposit ratio 101.3 99.1 2.2
Average core mortgage LTV 55.2 56.8 (1.6)
Core mortgage accounts > 3 months in arrears 0.14 0.13 0.01
NPL as a % of total exposures 0.3 0.3 -
---------------------------------------------- ----- ----- ------
1. Calculated as per PRA definition, excluding Bank of England reserves
2. Calculated in line with Pillar 3 requirements
Investor enquiries:
investorrelations@co-operativebank.co.uk
Gary McDermott, Treasurer and Head of Investor Relations: +44
(0) 7811 599495
Media enquiries:
Daniel Chadwick, Communications: +44 (0) 7724 701319
Nicki Parry, Communications: +44 (0) 7734 002983
Sam Cartwright, Maitland/AMO: +44 (0) 7827 254561
About The Co-operative Bank
The Co-operative Bank p.l.c. provides a range of banking
products and services to about 3.1m retail customers and c.95k
small and medium sized enterprises ('SME'). The Bank is committed
to values and ethics in line with the principles of the
co-operative movement. The Co-operative Bank is the only high
street bank with a customer-led ethical policy, which gives
customers a say in how their money is used. Launched in 1992, the
policy has been updated on six occasions, with new commitments
added in June 2022 to cover what we do for our planet, people and
the community.
The Co-operative Bank p.l.c. is authorised by the Prudential
Regulation Authority and regulated by the Financial Conduct
Authority and the Prudential Regulation Authority. The Co-operative
Bank p.l.c. eligible customers are protected by the Financial
Services Compensation Scheme in the UK, in accordance with its
terms.
Note: all figures contained in this announcement are unaudited.
This announcement contains inside information.
RISK MANAGEMENT
1. RISK MANAGEMENT OBJECTIVES & POLICIES - PRINCIPAL RISKS AND UNCERTAINTIES
Risk Management Framework
Financial risks arising from climate change are considered to be
a 'thematic risk'. This means that, rather than identifying climate
change as a risk in isolation, it reflects the fact that it impacts
and contributes towards many of the Group's existing principal risk
types. By establishing climate change risk as a thematic risk, the
Group is able to assess the combined impact of climate change
across the whole risk profile of the organisation, ensuring that
all areas are aware of how it might impact their business
activities, including taking the necessary mitigating actions.
Operational resilience was established as a thematic risk within
the Group's Risk Management Framework (RMF) in April 2022. This was
the result of the completion of a programme of work set up to
deliver key regulatory requirements and establish an enduring
model, including the timely identification of important business
services and scenario testing. This thematic approach allows for
assessment of the risks from operational disruptions across the
Group's existing risk types, to better prevent and respond to these
events in line with regulatory expectations.
The Group is in the process of implementing a number of actions
identified through completion of a Group-wide risk culture survey
to achieve improvements across the three lines of defence and shape
the next stage of development for the RMF.
Governance
The Group's governance structure was set out in detail in the
risk management section (1.7) of the 2021 Annual Report and
Accounts. There have been no material changes since year end.
Principal risks and uncertainties
As disclosed within the 2021 Annual Report and Accounts risk
management section (1.8), the Group has assessed its eight
principal risk categories on the basis of the key themes and
emerging risks associated with a particular category. The Group
classifies significant risks and emerging risks as follows:
Significant risks: A risk that, if crystallised, the residual
risk (based on its probability of crystallising and impact/loss to
the Group if it crystallised) is likely to cause a significant
impact to the Group's ability to operate, service customers,
protect its reputation and sustain its viability.
Emerging risks: A risk that has been identified but not yet
sufficiently materialised to allow it to become a significant risk
or issue that the Group is actively managing.
The categories of principal risks faced by the Group and which
may include significant or emerging risks are set out below:
-- Capital;
-- Credit (of which there are 4 sub-risks: Treasury, Unsecured, Secured and SME corporate);
-- Model;
-- Market;
-- Pension;
-- Operational (of which there are 13 sub-risks);
-- Liquidity and funding; and
-- Reputational.
Where relevant, the Group as a whole applies the same principal
risk categories and risk management processes to its subsidiary
companies.
Material changes to principal risks since the year end
There have been no material changes to the principal risk
categories identified by the Group, with all as reported in the
2021 Annual Report and Accounts. Updates to these risks versus what
was reported in the 2021 Annual Report and Accounts are presented
in this section.
Financial risks arising from climate change
The Group has demonstrated a commitment to safeguarding the
environment and promoting sustainable development as a central
element of our customer-led ethical policy for 30 years. The Group
relaunched its ethical policy in June 2022 focussing on three
pillars: planet, people and community. The policy details the
Group's commitment to work to limit and reduce global climate
change, take steps to halt and reverse the decline in biodiversity,
protect animal welfare, encourage our customers to make sustainable
choices and work with our business customers to help them develop
their sustainability policies and action plans. The ethical policy
also sets out circumstances where we will not provide banking
services to a business or organisation where their activities
contribute to global climate change, such as through the extraction
of fossil fuels and the unsustainable harvest of natural resources,
or whose activities infringe animal welfare standards, for example,
if they are involved in intensive farming or activities that
contribute to the degradation of important habitats.
The Group continues to develop its modelling and assessment
capabilities for quantifying climate change risk, including the use
of scenario analysis, in order to better understand the
implications of climate-related risks and opportunities both for
the organisation and its customers. As part of the 2022 ICAAP, the
Group undertook scenario analysis, using a developed model, to
assess the impacts of different climate change scenarios on credit
losses and RWA profile across the Group's secured portfolio. Focus
was placed on the secured portfolio as the Group believes that
properties within the mortgage book are its most material exposure
to climate-related risks. The assessment was largely aligned to the
requirements of the 2021 Climate Biennial Exploratory Scenario
(CBES) exercise by the Bank of England and the results will be
considered in future risk assessments and Group product strategy.
The Group continues to develop its understanding of the scale of
the Group's exposures to climate-related risks and the potential
short and long-term impacts of climate change to the Group's
business model and its customers.
Operational resilience
The Group has defined operational resilience risk thematically
within the RMF as the risk of the Group suffering operational
disruptions arising from the inability to prevent, adapt, respond
to, recover and learn from previous events. The Group recognises
that operational resilience risk can manifest as significant
challenges for businesses, as evidenced by the disruption caused by
the global financial crash in 2008 and the financial impacts of
more recent events such as the UK's withdrawal from the European
Union and the COVID-19 pandemic.
The Group has, in line with regulatory expectations, completed a
programme identifying and mapping key business services, assigned
impact tolerances to these areas and completed annual stress tests.
Appropriate remediation plans were developed where impact
tolerances were breached, or could be potentially breached as a
result of scenario testing. The Group will continue to monitor the
effectiveness of operational resilience risk management within the
organisation through appropriate review across the lines of defence
and the completion of annual scenario testing to ensure embedded
controls continue to protect the Group's operations and customers
from the impacts of disruptions to business.
Credit risk
------------
Definition:
Credit risk is the risk to earnings and capital that arises from
a customer's failure to meet legal and contractual payment
obligations. Credit risk applies to retail and SME.
Key themes previously reported:
In the 2021 Annual Report and Accounts, the Group noted that key
risks in 2021 related to a reliance on interest income from the
mortgage portfolio and advised of an intention to diversify income
streams. The Group recognised that credit risks could arise from
the macroeconomic impacts of both rising inflation and Bank of
England interest rate increases and that uncertainty around further
disruptions linked to the removal of COVID-19 government support
initiatives and the impact of the UK's withdrawal from the European
Union could crystallise as an increase in losses for the Group. The
Group also observed significant uncertainties around physical and
transition climate change risks, noting in particular the
requirement for landlords to obtain and provide energy performance
certificates (EPC).
In response to these risks, the Group had taken a prudent
approach and increased score cut-offs across all the residential
LTV segments to manage the quality of applications and mitigate the
risk of house price deterioration and was developing the SME risk
management framework for growth. To further mitigate against the
risk from affordability, any mortgage pipeline cases using
furloughed income, along with all applications from self-employed
customers, were referred to the Group's underwriting team for
manual review. Re-entry into 95% residential LTV lending was
managed through a lower risk appetite limit (compared to
pre-pandemic levels) as well as higher score cut-offs and
restricting flats/maisonettes as acceptable collateral. A
significant proportion of 95% LTV applications were also reviewed
by the Group's underwriting team.
Update:
The largest risk to our customers is affordability and the Group
is mindful that customer demand for advice and support will require
appropriate levels of staffing, which may be elevated from their
current levels.
The Group continues to adapt to a rapidly-evolving economic
landscape. The Group's low-risk asset book, which proved to be
stress resilient throughout the COVID-19 pandemic, remains high
quality so far in 2022 in the face of new external economic
pressures, with low levels of payment delinquency and arrears.
The non-performing loan ratio of 0.3% has remained consistent
since the end of December 2021, with similar ratios maintained
across the product segments of secured, unsecured, SME and legacy.
The core mortgage accounts more than 3 months in arrears have
remained stable at 0.14% (December 2021: 0.13%).
Overall, the SME asset book performance has been stable despite
government support schemes ending. Business Bounce-Back loan scheme
performance has been in line with expectations, with 20% of
eligible customers currently using a 'Pay As You Grow' or other
forbearance arrangement to support cash flow. Forbearance and
arrears levels in the rest of the book remain at low levels and,
alongside this, LTVs are low with the majority of the portfolio
being sub-60%.
There have been minimal movements (including credit rating
downgrades) in the low-risk profile of the treasury portfolio
during the year so far and the Group has not experienced any
historical defaults. The exposures remain predominantly
concentrated to counterparties rated AA- or higher, suggesting a
very low probability of default. Additionally, the Group's credit
monitoring has not identified any material changes in the
creditworthiness of its treasury counterparties as a result of the
evolving economic landscape, although this will continue to be
monitored closely as the impacts may materialise later in the year
in the face of further inflationary pressure and central bank
interest rate increases.
There are a number of emerging risks across the UK economy
including rising inflation, Bank of England base rate changes and
macroeconomic pressures as a result of the conflict in Ukraine,
other geopolitical issues and the growing scale of the cost of
living crisis, which are all likely to contribute to increased
pressures on our customers. In addition, SME customers are
continuing to adapt to the impacts of Brexit and changes in a
post-COVID-19 marketplace. These risks continue to be closely
monitored through credit risk reporting and regularly refreshed
arrears forecasting.
The Group has also noted that although within the UK overall
unemployment is low, the volume of low-skilled and unstable
occupations within the employment figures represents a general risk
to customer affordability and to business stability, as employers
are facing challenges recruiting specialist and skilled staff from
this limited recruitment pool. Additionally, the Group anticipates
that the unbalanced relationship between increasing house prices,
as shown by increases to the HPI across 2022, and stagnating wages
against the backdrop of Bank of England base rate increases and the
pressured economic environment is likely to affect property values
and impact customer affordability.
The Group cautiously monitors the levels of personal debt within
the UK, noting in particular the possible risks from the aggressive
growth of 'Buy Now Pay Later' (BNPL) lending alongside stressed
economic conditions. The Group has access to BNPL data as part of
retail customers' credit report data and although at present this
data is ring fenced, and so does not affect credit scoring, over
the course of 2022 the Group will review how customers' exposure to
BNPL is factored into lending decisions.
To account for cost of living changes, the Group's retail
affordability calculator is undergoing a current refresh. Stress
rates have been adjusted where required in the application process
to take into account any potential shocks that may put financial
pressure on our customers in the future. Additionally, the Group
has introduced new retail application scorecards for assessment of
new credit cards and current accounts and scheduled an
affordability review across unsecured products for the second half
of 2022. Debt service and sensitivity analysis tests for SME
customers have been updated along with sector-based key credit
criteria and all remain under review given current market
conditions.
The Group continues to closely monitor the evolving economic
landscape and the impact this may have on the performance of its
portfolios. Four decade-high levels of inflation (with the Bank of
England's June forecast expecting inflation to reach 11% this
year), rising interest rates and energy supply risks are amongst a
range of key factors all contributing to a rapidly rising cost of
living which is expected to persist for the remainder of the year
and place significant pressure on consumer finances. The Group is
mindful of the pressures on its customers and is prepared to
respond swiftly to the realised and possible credit risks that
arise from this.
Operational risk
-----------------
Definition:
The risk of loss resulting from inadequate or failed internal
processes, people, systems or external events.
Operational risk has 13 sub-risks as part of the Group's RMF.
These sub-risks are focussed on individually in the commentary
below. All sub-risks are subject to annual review and each risk is
managed individually and in line with the Group's RMF, including
having individual risk framework owners, risk policies and control
frameworks.
Key themes previously reported:
Previously, the Group reported increased volumes of fraud
against our customers linked to the COVID-19 pandemic. Whilst the
Group reported that some of the economic risks from the COVID-19
pandemic had reduced following the success of the 2021 UK
vaccination programme, there remained an industry-wide challenge to
attract and retain staff given the increase in remote working
opportunities across multiple sectors.
The Group also reported that a strategy was in place to remove
the highest-risk legacy systems and add additional contingency
arrangements to protect IT services until replacements were in
place to address a continued reliance on manual processes and
legacy or end-of-life IT systems.
The Group identified a number of emerging risks on the horizon,
including regulatory expectations with respect to operational
resilience and other regulatory change initiatives, such as HMT's
review of access to cash, the FCA's Consumer Duty, action to assist
mortgage prisoners, the introduction of a financial crime levy and
CRR II/IV impacts.
Update:
The pandemic caused new challenges in relation to maintaining
staffing levels due to absence and lockdown. Whilst these are
largely normalised, staffing levels continue to be challenging
caused by a disrupted labour market and increasing levels of
inflation. In response, the Group has initiated a number of actions
around recruitment and retention with a key focus on employee
wellbeing. Additionally, the Group has put in place process
amendments and simplifications to either reduce or remove activity
and continued to ensure that the IVR (interactive voice response)
call triage system prioritises essential customer contact, such as
reporting of fraud. Consequently, staff attrition levels have
remained within tolerance over the first half of 2022 and 'average
speed to answer' (ASA) metrics have improved. The SME contact
centre achieved ASA times of under three minutes in May 2022 and
remained within tolerance throughout June 2022. The retail contact
ASA times have also improved, with ASA metrics between May and June
2022 reducing to below 15 minutes, representing the fastest
answering times recorded within the last 12 months.
The Group has made significant improvements in its understanding
and articulation of technical debt. As a result, technical debt
remediation is a strategic objective, with a series of funded
programmes and projects to remove the highest risk legacy IT
systems. Reporting on the technical debt position and remediation
progress is now part of Group governance and is provided regularly
to the Group Board. Mitigation plans are being reviewed to ensure
that there is minimal impact to business as usual from the legacy
IT systems until they are removed. Many IT systems have been
remediated but timelines stretch through into 2023 and there
remains a significant dependency on the simplification activity
outlined below.
The Group is re-planning the mortgage and saving platform
simplification activity due to the complexity of the programme;
executive focus will continue to be applied to this, with clear
accountability on ownership and delivery. The regulators are
receiving frequent updates and multiple controls have been put in
place to drive visibility, transparency and accountability of this
simplification project to best ensure a safe and successful
migration of customers to the new platform. Completion of this
programme will mean a significant reduction to the Group's
operational risk profile and technology debt exposure during
2023.
The conflict in Ukraine has increased the risk of cyber attacks
from state sponsored groups or individual threat actors utilising
cyber attack mechanisms developed as part of the conflict. The
Group also anticipates that significant impacts would be likely in
the event of a future conflict in Taiwan. In recognition of the
growing threat of cyber attack both to our customers and as an
organisation, the Group has a number of funded initiatives to
mature its existing cyber security controls. The Group continues to
participate in industry groups and intelligence briefings to inform
horizon scanning and respond proactively to upcoming threats. The
Group has reflected these threats in its cyber strategy for 2022
and beyond to respond to the increasingly volatile threat
environment by continuing to invest in cyber defences and
addressing known vulnerabilities, specifically related to technical
debt.
The Group's fraud losses of GBP7.2m in the year to date continue
to be over budget and form a significant portion of operational
losses. These fraud losses mainly originate from card fraud
typologies often featuring phishing, spoofed calls, social
engineering and the conversion of fraudulently obtained funds into
cryptocurrency. The Group has restricted access to multiple
cryptocurrency exchanges and has become a member of Stop Scams UK,
signing up to their '159' service to help prevent our customers
being defrauded and enabling them to report fraud more quickly. A
GBP500k fraud investment has been allocated for tactical activities
in 2022, targeting number spoofing and account takeover on dormant
accounts, with other initiatives to reduce fraud under review. The
Group plans to deliver behavioural biometrics security enhancements
through the implementation of Trusteer into the control framework
by July 2022. The Group's implementation of a PSD2-compliant 'card
not present' solution has been delayed, with implementation now
planned in August 2022. Plans to deliver upgrades to fraud systems
have been delayed until September 2022. Once implemented, the Group
anticipates that these enhancements to the control framework will
deliver significant reductions in year-on-year fraud losses.
In October 2018, Mortgage Agency Services Number Five Limited
('MAS 5'), a subsidiary of the Group, received a complaint from a
mortgage customer regarding changes made to MAS 5's standard
variable rate between 2009 and 2012. The complaint was referred to
the FOS and on 26 August 2021 the FOS found that it had
jurisdiction to consider the complaint. MAS 5 issued a claim for a
judicial review of FOS's decision on the grounds that the Group
considers this part of the complaint to be outside of FOS's
jurisdiction by reason of being time-barred under DISP 2.8.2. A
final hearing took place on 15 June 2022. Judgement was published
on 27 July 2022 and the Group's application for judicial review was
dismissed.
As this was a case concerning a decision on whether or not the
events are within the FOS's jurisdiction and not on the merits of
the underlying complaint, it is still not currently possible to
predict the scope and ultimate outcome on the Group. This is only
the first in a series of contingent events that would need to
happen to result in adverse outcomes, in order for the Group to be
exposed to any significant liability. Given the early stages of
this process, there is no current obligation under accounting
standards to provide an estimate of any potential financial impact.
The Group remains satisfied that these historical variations were
applied fairly and in accordance with the terms and conditions of
the mortgage contract.
The Group is now materially compliant with the EBA-published
revised Guidelines on Outsourcing Arrangements that became
effective from 31 March 2022. There are areas for continued focus
to embed the associated framework for managing suppliers under the
new framework with all three lines of defence contributing. Key
areas for the Group are exit plans, operational resilience of
suppliers and revised risk assessments for the in-scope suppliers.
In addition, the Group is assessing its software licensing position
to identify potential opportunities and/or risks from related
shortfalls or over-subscriptions. The Group's implementation of the
Resolvability Assessment Framework is still on track for delivery
by the end of 2022. As part of simplification activity the Group
continues to work closely with Capita to ensure a seamless
re-integration of mortgage servicing operations back in-house,
ensuring that resourcing levels are appropriate to support our
customers during an increasingly uncertain economic period.
Capital risk
-------------
Definition:
The risk that the Bank's regulatory capital resources are
inadequate to cover its regulatory capital requirements.
Key themes previously reported:
The Group reported total RWAs as at 31 December 2021 of
GBP4,373.4m. This figure has since been utilised to derive the
Group's capital requirement. Increases in RWAs are driven either by
increases in the underlying assets or increases in the risk
weighting (or density) assigned to these assets. We previously
reported that significant changes in RWAs have been driven by
Policy Statement 11/20 (PS11/20: Credit Risk: Probability of
Default and Loss Given Default estimation), which became effective
from 1 January 2022. The Group implemented a post-model adjustment
(PMA) of GBP502m from 1 January 2022 in order to address the
Group's non-compliance with the PRA's expectations for hybrid
models. Whilst hybrid model development is still ongoing for many
firms, with permission to estimate RWAs on the Internal Ratings
Based (IRB) approach, the Group continues to engage with the PRA to
ensure compliance. In the Group's 2021 Annual Report and Accounts,
we noted that these changes are expected to drive a reduction in
the Group's CET1 ratio of approximately 3% by the end of 2022.
Further information is given below in the update section.
We have previously indicated that the ability to maintain
sufficient capital resources now and in the future was dependent on
the Group's return to profitability and successful issuances of
MREL-qualifying debt within external capital markets. In the last
update, we highlighted the contingency of the successful
implementation of the Group's strategy and its return to
profitability upon a range of external factors, including market
conditions, the general business environment, regulation (including
currently unexpected regulatory change), the activities of its
competitors and consumers and the legal and political
environment.
At 31 December 2021 year end, we reported on the impact of the
introduction of the MREL framework in the UK, requiring the Group
to issue additional MREL-qualifying capital to meet future
requirements. It was noted that the quantum, form and timing of
these capital issuances would be influenced by investor appetite in
an evolving economic environment as well as the Group's capital
requirements, which are subject to uncertainty largely as a result
of the expected RWA impact of PS11/20 and secured model
development. The 2020 MREL issuance, along with favourable
financial results, continuing robustness in credit profile and
external credit rating agency upgrades in 2021 led to the Group's
structured debt trading at favourable levels on the secondary
market. We stated that this would give us further confidence in the
delivery of our issuance plans in 2022 to meet MREL end-state
requirements and demonstrate capital resilience. A further update
on our capital position is given below.
Update:
In April 2022, the Group issued GBP250m of MREL-qualifying fixed
rate (6% per annum) reset callable notes. This transaction,
labelled a 'green' bond under the Group's Green, Social and
Sustainability Financing Framework, attracted total orders of
approximately GBP350m with 60% of orders placed with long-term
investors: a huge achievement for the Bank during a period of
significant market uncertainty following Russia's invasion of
Ukraine. The issuance represents a big milestone towards achieving
end-state MREL compliance and greatly reducing the risk of
non-compliance with capital requirements by 1 January 2023.
As the final impact of PS11/20 model remediation remains subject
to change, an increase in the expected impact may adversely affect
the Group's financial position and require additional capital
issuances in 2022. This contributes to the overall uncertainty
surrounding the Group's capital position in the second half of 2022
and, whilst we expect to become more confident in overall RWA
impact as future model development milestones are reached with the
PRA, this will remain subject to change until final model approval
and implementation.
In June 2022, the Group's Model Risk Oversight Committee
reconsidered the PMA approved in January. The Group holds a
suitably-sized PMA for this development, weighted towards the
anticipated RWA outcome. This comes with substantial risks as the
regulator is yet to approve the Group's models, which will be
submitted in September. The Group continues to progress the retail
secured PS11/20 model remediation programme with regular engagement
sessions held with the PRA.
Other risks to the Group's capital include potential changes in
the Group's capital requirements arising from the PRA's Capital
Supervisory Review and Evaluation Process (C-SREP), where there
remains uncertainty in respect of capital buffers due in the second
half of the year, the credit risk arising from the current
pressures being placed on households as the cost of living
continues to rise, and the expected increase of the Counter
Cyclical Buffer (CCyB) to 1% in December 2022 and then 2% in June
2023, which will increase the Group's capital requirements.
At 30 June 2022, the Group has maintained sufficient capital
resources to meet MREL and capital buffers but is not yet total
buffer compliant. The Group is confident that it can further
improve its financial resilience through maintaining the
profitability displayed in the first half of 2022 across the second
half of the year. Market conditions have favoured the Group in the
first half of the year, with rises in base rate driving net
interest income growth, whilst increases in HPI have allowed for
reductions in secured risk-weight density across the first half of
the year following the increase driven by a PS11/20 PMA applied at
1 January 2022.
Other risks
------------
Market risk:
Key themes previously reported:
Within the market risk section of the 2021 Annual Report and
Accounts the mortgage market response to underlying economic
conditions and expectations of future base rate rises was noted as
an emerging risk.
Update on mortgage markets:
Over the first half of 2022, the mortgage market has remained
challenging and competitive, forcing downward pressure on
completion volumes and margins across both new business and
retention. This has been compounded by rising swap rates, as
financial markets have reacted to both actual and expected changes
in base rate. In 2020 and 2021, the Group was able to write high
volumes of mortgages on five-year fixed rate terms with strong
completion margins, which has ensured that blended margins across
the book remain strong. As reported in the 2021 Annual Report and
Accounts, recent trading activity has been more weighted at
two-year fixed rate terms, as the Group has sought to protect
margin across five-year products.
The Group has reacted quickly to market volatility through the
removal and repricing of products, ensuring that the impact to
margins is minimised and the Group is able to write mortgages that
drive a sufficient return. The Group expects to see more volatility
in the mortgage market over the second half of 2022 and further
action may be required to manage both mortgage margins and
volume.
LIBOR transition
The Group has exposure to legacy LIBOR-linked products,
primarily across its legacy retail secured and corporate
portfolios. The LIBOR benchmark was phased out at the end of 2021,
and the majority of the work to transition the Group's affected
exposures to an alternative basis of rates has been completed as at
30 June 2022. The project has been jointly sponsored by the Group's
Chief Financial Officer and Chief Administrative Officer, and
progress has been regularly reported into relevant committees,
including the Group's Asset and Liability Committee (ALCo) and
Executive Risk Oversight Committee (EROC), with a Group-wide
working group managing and co-ordinating transition delivery.
During the first half of the year the Group successfully
transitioned the majority of its retail secured and corporate LIBOR
exposures to replacement rates; there remains a relatively small
population of 'tough legacy' contracts (i.e. those that do not
allow for variation of benchmark rates), for which solutions
continue to be developed. The primary risks to which the Group is
exposed through the transition work are operational risk associated
with the execution of the transitions and conduct risk arising from
potential detrimental customer outcomes, particularly with regard
to the tough legacy exposures. The FCA has recently commenced a
consultation regarding the proposed winding down of 'synthetic'
LIBOR. This exposes the Bank to additional risk in relation to
LIBOR on tough legacy exposures where the interest rates are
currently based on the synthetic LIBOR benchmark rates. The Group
has worked actively to mitigate these risks, including by engaging
extensively with relevant regulatory bodies and the wider industry
to ensure its approach adheres to market best practice.
The table below outlines the Group's exposure at 30 June 2022 to
significant IBORs subject to reform that are yet to be transitioned
to an alternative benchmark rate. The carrying amounts of financial
assets are presented gross of any expected credit losses
(ECLs).
30 June 2022 31 December 2021
--------------------------------------------------- ---------------------------------------------------
Non-derivatives Derivatives Non-derivatives Derivatives
-------------------------------------- --------------------------------------
Financial Financial
assets Financial liabilities Nominal assets Financial liabilities Nominal
Carrying value Carrying value amount Carrying value Carrying value amount
---------- --------------- --------------------- ----------- --------------- --------------------- -----------
GBP LIBOR 170.9 - 173.7 704.6 - 326.0
---------- --------------- --------------------- ----------- --------------- --------------------- -----------
Of the above balances, GBP28.7m are classed as tough legacy,
where the balances will remain on a synthetic LIBOR rate until a
solution for transfer is identified. The remaining balances are
also temporarily on synthetic LIBOR, but consent to transfer to a
replacement rate has either been contractually agreed or is
expected to be contractually agreed in the near future.
The Group also has responsibility for the migration of certain
legacy LIBOR retail secured assets sold to unconsolidated
structured entities or other third parties but where it continues
to hold legal title. The gross outstanding balances of these LIBOR
assets not recognised on the Group's balance sheet are GBP149.0m at
30 June 2022 (31 December 2021: GBP964.8m), of which GBP149.0m are
classed as tough legacy (31 December 2021: GBP244.6m).
2. CREDIT RISK
All amounts are stated in GBPm unless otherwise indicated
Credit risk is the risk to earnings and capital arising from a customer's
failure to meet their legal and contractual obligations.
The Group manages credit risk on the following balance sheet
items:
-- Loans and advances to banks;
-- Loans and advances to customers;
-- Investment securities;
-- Derivative financial instruments; and
-- Other assets.
Expected credit loss (ECL) assessment approach
The Group's portfolio of assets on which credit risk is managed
remains low-risk and well-positioned to withstand the current
environment.
During 2022 the Group has observed the following impacts:
1. Level of arrears in the mortgage portfolio remains stable
compared to the year end: 0.14% as at 30 June 2022 (0.13% at 31
December 2021).
2. There has not been a significant amount of material defaults
in the SME or legacy corporate portfolios in the period. The main
case to default was already covered through the collective ECL. The
profiles of customers are closely monitored including via
strategies to identify and contact 'at risk' customers as described
in the year end risk management report and which are managed on a
case-by-case basis.
More information is included in note 2 to the condensed
consolidated financial statements in relation to assumptions around
stage transfers and also in relation to the economic scenarios.
Allowance for losses and credit impairment charge analysis by
segment
Although the Group manages credit risk arising from a number of
balance sheet items, the most significant is the loans and
advances. The following tables analyse the allowance for losses as
at 30 June 2022 and the credit impairment charge for the period by
segment. Comparative information is shown within the analysis of
credit risk section alongside segmental information disclosed
within note 3 and information included in note 8 in relation to
loans and advances to customers.
The credit impairment (ECL charge) and the allowance for losses
(ECL provision) for the period arises from both modelled and also
post-model adjustments (PMAs) (i.e. expert management judgement
overlays). These management judgements were described within the
Annual Report and Accounts within the critical judgements of note
2, with an update in note 2 of this document. During the period,
the following represent the key movements within ECL:
Retail - the ECL provision has moved from GBP25.5m to GBP22.4m.
This GBP3.1m reduction is driven by a lower retail secured ECL
provision of GBP4.1m, partially offset by higher credit cards
(GBP0.5m) and overdrafts (GBP0.5m) ECL provisions. A key driver of
movement in ECL is changes in the PMAs applied by the Group, which
are disclosed in further detail in note 2 to the condensed
consolidated financial statements. This has resulted in a lower
coverage of c.7bps on the retail secured Platform book, whilst
reflecting movement in exposures from stage 1 to stage 2.
SME - the increase of ECL provision from GBP6.7m to GBP7.2m
reflects a small increase in specific provision and PMA movements
(described in note 2).
Legacy & central items - the ECL provision has decreased
from GBP5.2m at 31 December 2021 to GBP3.1m (including assets held
at FVTPL). The PMA movement is described in note 2. The majority of
the decrease is due to a release on one specific corporate
case.
Analysis of credit risk
Core
--------------- ------------------ --------
Legacy &
30 June 2022 Retail SME central items (2) Total
------------------------------------------------- -------- ----- ------------------ --------
Analysis of credit risk exposure
Gross accounting balances 19,838.9 399.7 677.2 20,915.8
Less: accounting adjustments(1) (67.4) (7.1) (8.3) (82.8)
------------------------------------------------- -------- ----- ------------------ --------
Gross customer balances 19,771.5 392.6 668.9 20,833.0
Credit commitments 1,503.8 133.4 68.6 1,705.8
------------------------------------------------- -------- ----- ------------------ --------
Gross customer exposure 21,275.3 526.0 737.5 22,538.8
------------------------------------------------- -------- ----- ------------------ --------
Less: customer balances measured at FVTPL(1) (1.6) (3.1) (95.1) (99.8)
------------------------------------------------- -------- ----- ------------------ --------
Net customer exposure subject to ECL calculation 21,273.7 522.9 642.4 22,439.0
------------------------------------------------- -------- ----- ------------------ --------
Allowance for losses
Collectively modelled ECL 8.8 0.8 1.3 10.9
Individually assessed ECL(2) - 1.9 1.4 3.3
Post-model adjustments (PMAs) 13.6 4.5 0.4 18.5
------------------------------------------------- -------- ----- ------------------ --------
Total ECL 22.4 7.2 3.1 32.7
------------------------------------------------- -------- ----- ------------------ --------
1. Accounting adjustments include the FV element above the
customer balance amount for those loans measured at FVTPL.
2. Includes GBP0.6m credit adjustment to a FVTPL loan that has
been presented as a loss allowance to provide a fuller picture of
the Group's expected credit losses.
Core
--------------- ------------------ --------
Legacy &
31 December 2021 Retail SME central items (2) Total
------------------------------------------------- -------- ----- ------------------ --------
Analysis of credit risk exposure
Gross accounting balances 19,833.3 445.1 761.1 21,039.5
Less: accounting adjustments(1) (77.3) (3.4) (18.3) (99.0)
------------------------------------------------- -------- ----- ------------------ --------
Gross customer balances 19,756.0 441.7 742.8 20,940.5
Credit commitments 1,846.7 93.0 119.8 2,059.5
------------------------------------------------- -------- ----- ------------------ --------
Gross customer exposure 21,602.7 534.7 862.6 23,000.0
------------------------------------------------- -------- ----- ------------------ --------
Less: customer balances measured at FVTPL(1) (1.6) (3.7) (97.6) (102.9)
------------------------------------------------- -------- ----- ------------------ --------
Net customer exposure subject to ECL calculation 21,601.1 531.0 765.0 22,897.1
------------------------------------------------- -------- ----- ------------------ --------
Allowance for losses
Collectively modelled ECL 7.5 0.7 1.5 9.7
Individually assessed ECL - 1.6 0.9 2.5
Post-model adjustments (PMAs) (2) 18.0 4.4 2.8 25.2
------------------------------------------------- -------- ----- ------------------ --------
Total ECL 25.5 6.7 5.2 37.4
------------------------------------------------- -------- ----- ------------------ --------
1. Accounting adjustments include the FV element above the
customer balance amount for those loans measured at FVTPL.
2. Includes GBP1.9m credit adjustment to a FVTPL loan that has
been presented as a loss allowance to provide a fuller picture of
the Group's expected credit losses.
Core
------------------------------- ------------- -------------- ----- ------------------
Legacy &
Retail SME central items Total Of which: FVTPL(1)
------------------------------- ------ ----- -------------- ----- ------------------
Credit impairment (ECL charge)
Six months to 30 June 2022 1.5 (0.8) 2.1 2.8 1.3
------------------------------- ------ ----- -------------- ----- ------------------
1. Relates to credit risk adjustment to fair value. Shown within
Legacy & central items.
The movement in the gross customer exposure (excludes those
assets held at FVTPL) across the segments is shown below:
Gross customer exposure for ECL - Purchased or Originated Credit
Retail Stage 1 Stage 2 Stage 3 Impaired (POCI) Total
--------------------------------------- --------- ------- ------- ------------------------------------- ---------
At 31 December 2021 20,979.7 501.3 49.5 70.6 21,601.1
Changes arising from stage transfers:
To lifetime ECL (stage 1 to 2) (1) (952.3) 952.3 - - -
To credit impaired (stage 1 or 2 to
3) (8.3) (8.9) 17.2 - -
To 12 month ECL (stage 2 to 1) 135.3 (135.3) - - -
From credit impaired (stage 3 to 2 or
1) 2.6 2.6 (5.2) - -
--------------------------------------- --------- ------- ------- ------------------------------------- ---------
Net changes arising from stage
transfers (822.7) 810.7 12.0 - -
Other charges/(releases):
New assets originated or purchased 996.3 - - - 996.3
Other changes to risk parameters 72.4 - - - 72.4
Redemptions and repayments (1,333.8) (44.2) (10.3) (5.5) (1,393.8)
--------------------------------------- --------- ------- ------- ------------------------------------- ---------
Net other charges/(releases) (1,087.8) 766.5 1.7 (5.5) (325.1)
--------------------------------------- --------- ------- ------- ------------------------------------- ---------
Assets written off (0.2) (0.5) (1.5) (0.1) (2.3)
--------------------------------------- --------- ------- ------- ------------------------------------- ---------
At 30 June 2022 19,891.7 1,267.3 49.7 65.0 21,273.7
--------------------------------------- --------- ------- ------- ------------------------------------- ---------
1. See allowances for losses and credit impairment charge
analysis by segment for more detail.
Gross customer exposure for ECL - SME Stage 1 Stage 2 Stage 3 POCI Total
------------------------------------------- ------- ------- ------- ---- ------
At 31 December 2021 114.5 411.4 3.9 1.2 531.0
Changes arising from stage transfers:
To lifetime ECL (stage 1 to 2) (48.9) 48.9 - - -
To credit impaired (stage 1 or 2 to 3) (0.4) (4.2) 4.6 - -
To 12 month ECL (stage 2 to 1) 45.7 (45.7) - - -
From credit impaired (stage 3 to 2 or 1) - 0.1 (0.1) - -
------------------------------------------- ------- ------- ------- ---- ------
Net changes arising from stage transfers (3.6) (0.9) 4.5 - -
Other charges/(releases):
New assets originated or purchased 82.3 - - - 82.3
Other changes to risk parameters - - - - -
Redemptions and repayments (30.4) (59.1) (0.6) - (90.1)
------------------------------------------- ------- ------- ------- ---- ------
Net other charges/(releases) 48.3 (60.0) 3.9 - (7.8)
------------------------------------------- ------- ------- ------- ---- ------
Assets written off (0.1) (0.1) (0.1) - (0.3)
------------------------------------------- ------- ------- ------- ---- ------
At 30 June 2022 162.7 351.3 7.7 1.2 522.9
------------------------------------------- ------- ------- ------- ---- ------
Gross customer exposure for ECL - Legacy Stage 1 Stage 2 Stage 3 POCI Total
------------------------------------------- ------- ------- ------- ----- -------
At 31 December 2021 732.7 10.2 14.2 7.9 765.0
Changes arising from stage transfers:
To lifetime ECL (stage 1 to 2) (1.6) 1.6 - - -
To credit impaired (stage 1 or 2 to 3) (0.1) (0.4) 0.5 - -
To 12 month ECL (stage 2 to 1) 1.0 (1.0) - - -
From credit impaired (stage 3 to 2 or 1) - - - - -
------------------------------------------- ------- ------- ------- ----- -------
Net changes arising from stage transfers (0.7) 0.2 0.5 - -
Other charges/(releases):
New assets originated or purchased - - - - -
Other changes to risk parameters (9.1) (0.7) (0.5) - (10.3)
Redemptions and repayments (109.6) (1.0) (0.9) (0.6) (112.1)
------------------------------------------- ------- ------- ------- ----- -------
Net other charges/(releases) (119.4) (1.5) (0.9) (0.6) (122.4)
------------------------------------------- ------- ------- ------- ----- -------
Assets written off - - (0.1) (0.1) (0.2)
------------------------------------------- ------- ------- ------- ----- -------
At 30 June 2022 613.3 8.7 13.2 7.2 642.4
------------------------------------------- ------- ------- ------- ----- -------
The movement in the allowance for losses across the three
segments (excludes FVTPL) is shown below:
Allowance for losses - Retail Stage 1 Stage 2 Stage 3 POCI Total
------------------------------------------- ------- ------- ------- ---- -----
At 31 December 2021 19.2 2.2 4.0 0.1 25.5
Changes arising from stage transfers:
To lifetime ECL (stage 1 to 2) (1.5) 7.9 - - 6.4
To credit impaired (stage 1 or 2 to 3) - (0.1) 1.6 - 1.5
To 12 month ECL (stage 2 to 1) 0.2 (0.6) - - (0.4)
From credit impaired (stage 3 to 2 or 1) - - (0.1) - (0.1)
------------------------------------------- ------- ------- ------- ---- -----
Net changes arising from stage transfers (1.3) 7.2 1.5 - 7.4
Other charges/(releases):
New assets originated or purchased 1.2 - - - 1.2
Other changes to risk parameters (8.9) 1.1 (0.2) - (8.0)
Redemptions and repayments (1.0) (0.2) (0.5) - (1.7)
------------------------------------------- ------- ------- ------- ---- -----
Net other charges/(releases) (10.0) 8.1 0.8 - (1.1)
------------------------------------------- ------- ------- ------- ---- -----
Assets written off (0.3) (0.5) (1.2) - (2.0)
------------------------------------------- ------- ------- ------- ---- -----
At 30 June 2022 8.9 9.8 3.6 0.1 22.4
------------------------------------------- ------- ------- ------- ---- -----
Allowance for losses - SME Stage 1 Stage 2 Stage 3 POCI Total
------------------------------------------- ------- ------- ------- ----- -----
At 31 December 2021 0.4 4.2 1.6 0.5 6.7
Changes arising from stage transfers:
To lifetime ECL (stage 1 to 2) (0.1) 1.1 - - 1.0
To credit impaired (stage 1 or 2 to 3) - (0.1) 0.4 - 0.3
To 12 month ECL (stage 2 to 1) 0.1 (0.5) - - (0.4)
From credit impaired (stage 3 to 2 or 1) - - - - -
------------------------------------------- ------- ------- ------- ----- -----
Net changes arising from stage transfers - 0.5 0.4 - 0.9
Other charges/(releases):
New assets originated or purchased 0.1 - - - 0.1
Other changes to risk parameters 0.2 0.4 - (0.4) 0.2
Redemptions and repayments (0.1) (0.4) 0.1 - (0.4)
------------------------------------------- ------- ------- ------- ----- -----
Net other charges/(releases) 0.2 0.5 0.5 (0.4) 0.8
------------------------------------------- ------- ------- ------- ----- -----
Assets written off (0.1) - (0.2) - (0.3)
------------------------------------------- ------- ------- ------- ----- -----
At 30 June 2022 0.5 4.7 1.9 0.1 7.2
------------------------------------------- ------- ------- ------- ----- -----
Allowance for losses - Legacy Stage 1 Stage 2 Stage 3 POCI Total
------------------------------------------- ------- ------- ------- ---- -----
At 31 December 2021(1) 1.6 0.4 1.3 - 3.3
Changes arising from stage transfers:
To lifetime ECL (stage 1 to 2) - - - - -
To credit impaired (stage 1 or 2 to 3) - - (0.1) - (0.1)
To 12 month ECL (stage 2 to 1) - - - - -
From credit impaired (stage 3 to 2 or 1) - - - - -
------------------------------------------- ------- ------- ------- ---- -----
Net changes arising from stage transfers - - (0.1) - (0.1)
Other charges/(releases):
Other changes to risk parameters (0.2) (0.2) - - (0.4)
Redemptions and repayments (0.2) (0.1) 0.1 - (0.2)
------------------------------------------- ------- ------- ------- ---- -----
Net other charges/(releases) (0.4) (0.3) - - (0.7)
------------------------------------------- ------- ------- ------- ---- -----
Assets written off - - (0.1) - (0.1)
------------------------------------------- ------- ------- ------- ---- -----
At 30 June 2022 (1) 1.2 0.1 1.2 - 2.5
------------------------------------------- ------- ------- ------- ---- -----
1. Excludes credit risk adjustment to fair value (30 June 2022:
GBP0.6m, 31 December 2021: GBP1.9m).
Secured residential portfolio analysis
The following tables show the secured residential drawn balances
(excluding Legacy) analysed by a number of key risk measurements.
The portfolio has remained stable in size. Within this book 3.3% of
balances have a probability of default (PD) of greater than 1% (31
December 2021: 3.9%). The book is also subject to a range of
forbearance measures which are detailed in the 2021 Annual Report
and Accounts.
a) Loan-to-value (LTV) and repayment type
The table shows gross customer balances analysed by indexed LTV
bandings (with interest only including mortgages on a part
repayment/part interest basis).
30 June 2022 31 December 2021
----------------------------------- ------------------------------------------
Capital
LTV % repayment Interest only Total Capital repayment Interest only Total
----------------------------- ---------- ------------- -------- ----------------- ------------- --------
Less than 50% 5,984.2 1,129.8 7,114.0 5,441.7 1,046.8 6,488.5
50% to 60% 3,251.6 510.9 3,762.5 2,957.7 539.1 3,496.8
60% to 70% 3,805.0 202.6 4,007.6 3,651.4 284.8 3,936.2
70% to 80% 3,287.1 53.4 3,340.5 3,481.3 62.4 3,543.7
80% to 90% 1,168.3 1.8 1,170.1 1,900.7 2.6 1,903.3
90% to 100% 130.5 0.7 131.2 137.4 0.8 138.2
Greater than or equal to 100% 0.4 0.3 0.7 0.4 0.8 1.2
----------------------------- ---------- ------------- -------- ----------------- ------------- --------
17,627.1 1,899.5 19,526.6 17,570.6 1,937.3 19,507.9
----------------------------- ---------- ------------- -------- ----------------- ------------- --------
b) Mortgage type
The table below shows gross customer balances for mortgages
analysed by asset class. The LTV shown is the current indexed
average percentage. 99.8% of the total book is classified as prime
or buy-to-let mortgages. The higher risk self-certified, almost
prime and non-conforming account for only 0.2% of the total
book.
30 June 2022 31 December 2021
---------------------------- ----------------------------
Gross Gross
customer Average Interest customer Average Interest
balance LTV % only % balance LTV % only %
------------------ --------- ------- -------- --------- ------- --------
Prime residential 18,000.5 55.7 3.6 18,054.7 57.3 4.1
Buy-to-let 1,490.3 49.3 81.8 1,416.0 51.4 82.8
Self-certified 24.4 32.2 92.9 25.7 34.0 92.6
Almost prime 9.4 29.9 35.7 10.2 31.5 35.4
Non-conforming 2.0 49.7 75.1 1.3 58.3 18.8
------------------ --------- ------- -------- --------- ------- --------
19,526.6 55.2 9.7 19,507.9 56.8 9.9
------------------ --------- ------- -------- --------- ------- --------
c) UK regional distribution
The table below shows the analysis of LTVs and gross customer
balances by UK regions.
30 June 2022 31 December 2021
------------------------------- -------------------------------
Gross customer balance LTV - % Gross customer balance LTV - %
----------------------- ---------------------- ------- ---------------------- -------
London & South East 7,552.6 54.5 7,470.1 56.4
Northern England 4,466.5 56.4 4,459.9 58.0
Midlands & East Anglia 4,057.0 55.7 4,103.2 56.4
Wales & South West 2,384.8 53.4 2,390.9 56.0
Other 1,065.7 56.6 1,083.8 57.6
----------------------- ---------------------- ------- ---------------------- -------
19,526.6 55.2 19,507.9 56.8
----------------------- ---------------------- ------- ---------------------- -------
Unsecured retail portfolio analysis
The table below shows the analysis of unsecured retail gross
customer exposure by product. The decline reflects the continued
lower usage of cards and overdrafts. The drawn balance has declined
from a combined GBP248.1m to GBP244.9m.
30 June 2022 31 December 2021
---------------------------- ----------------------------
Gross customer exposure ECL Gross customer exposure ECL
------------- ----------------------- --- ----------------------- ---
Credit cards 1,101.3 6.1 1,126.8 5.6
Overdrafts 189.0 3.6 192.1 3.1
------------- ----------------------- --- ----------------------- ---
1,290.3 9.7 1,318.9 8.7
------------- ----------------------- --- ----------------------- ---
SME portfolio analysis
The table below shows the analysis of SME gross customer
exposure by product. The movement is driven through CBILS and
Bounce-Back loan lending declining as the scheme has been completed
and repayments have started, mainly offset by new lending.
30 June 2022 31 December 2021
---------------------------- ----------------------------
Gross customer exposure ECL Gross customer exposure ECL
-------------------------- ----------------------- --- ----------------------- ---
Secured loans 163.9 1.9 172.9 2.3
CBILS & Bounce-Back loans 259.6 3.1 299.9 2.3
Unsecured loans 99.4 2.2 58.2 2.1
-------------------------- ----------------------- --- ----------------------- ---
522.9 7.2 531.0 6.7
-------------------------- ----------------------- --- ----------------------- ---
Sector analysis
The table below analyses the gross customer exposure for the SME
by sector excluding FVTPL of GBP3.1m (31 December 2021: GBP3.7m).
The exposure to higher-risk sectors is limited.
30 June 2022 31 December 2021
Business banking 226.5 260.3
Commercial real estate (CRE) 97.1 88.4
Food/hotel 29.7 31.8
Retail/wholesale 24.0 18.3
Care 19.2 18.4
Charities 15.1 17.7
Finance/legal 15.0 7.0
Renewable energy 8.7 9.5
Education 6.8 7.8
Housing association 1.8 2.0
Other 79.0 69.8
----------------------------- ------------ ----------------
522.9 531.0
----------------------------- ------------ ----------------
Legacy portfolio analysis
The table below shows the analysis of corporate legacy gross
customer exposure by sector. As shown below the majority of the
balance is either in the low-risk private finance initiative (PFI)
or housing association (HA) sectors.
30 June 2022 31 December 2021
------------------------------ ------------------------------
Gross customer exposure ECL Gross customer exposure ECL
---------------------------------------------------- ----------------------- ----- ----------------------- -----
PFI 421.9 1.7 499.6 2.0
HA 263.0 0.1 280.9 0.1
Other 31.5 0.8 43.6 2.4
---------------------------------------------------- ----------------------- ----- ----------------------- -----
716.4 2.6 824.1 4.5
Less: FVTPL (95.1) (0.6) (97.6) (1.9)
---------------------------------------------------- ----------------------- ----- ----------------------- -----
Total corporate 621.3 2.0 726.5 2.6
---------------------------------------------------- ----------------------- ----- ----------------------- -----
Unsecured personal loans 2.0 0.2 3.8 0.5
Unsecured professional and career development loans
(PCDL) - - 14.3 -
Secured - Optimum 19.1 0.3 20.4 0.2
---------------------------------------------------- ----------------------- ----- ----------------------- -----
Total legacy 642.4 2.5 765.0 3.3
---------------------------------------------------- ----------------------- ----- ----------------------- -----
INDEPENT REVIEW REPORT TO THE CO-OPERATIVE BANK HOLDINGS
LIMITED
Conclusion
We have been engaged by the Group to review the condensed set of
financial statements in the half-yearly financial report for the
six months ended 30 June 2022 which comprises the Condensed
Consolidated Income Statement, Condensed Consolidated Statement of
Comprehensive Income, Condensed Consolidated Balance Sheet,
Condensed Consolidated Statement of Cashflows, Condensed Statement
of Changes in Equity and related notes 1 to 17. We have read the
other information contained in the half-yearly financial report and
considered whether it contains any apparent misstatements or
material inconsistencies with the information in the condensed set
of financial statements.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2022 is not prepared, in all material respects, in accordance
with the accounting policies outlined in note 1, which comply with
UK-adopted International Accounting Standards.
Basis for Conclusion
We conducted our review in accordance with International
Standard on Review Engagements (UK) 2410, "Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity" issued by the Financial Reporting Council. A review of
interim financial information consists of making enquiries,
primarily of persons responsible for financial and accounting
matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
As disclosed in note 1.1, the annual financial statements of the
Group are prepared in accordance with UK-adopted international
accounting standards.
Conclusions Relating to Going Concern
Based on our review procedures, which are less extensive than
those performed in an audit as described in the Basis for
Conclusion section of this report, nothing has come to our
attention to suggest that management have inappropriately adopted
the going concern basis of accounting or that management have
identified material uncertainties relating to going concern that
are not appropriately disclosed.
This conclusion is based on the review procedures performed in
accordance with this ISRE, however future events or conditions may
cause the entity to cease to continue as a going concern.
Responsibilities of the Directors
The Directors are responsible for preparing the half-yearly
financial report in accordance with the accounting policies set out
in note 1.
In preparing the half-yearly financial report, the Directors are
responsible for assessing the Group's ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the
Directors either intend to liquidate the company or to cease
operations, or have no realistic alternative but to do so.
Auditor's Responsibilities for the review of the financial
information
In reviewing the half-yearly report, we are responsible for
expressing to the Group a conclusion on the condensed set of
financial statements in the half-yearly financial report. Our
conclusion, including our Conclusions Relating to Going Concern,
are based on procedures that are less extensive than audit
procedures, as described in the Basis for Conclusion paragraph of
this report.
Use of our report
This report is made solely to the Group in accordance with
guidance contained in International Standard on Review Engagements
2410 (UK) "Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Financial
Reporting Council. To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone other than the Group,
for our work, for this report, or for the conclusions we have
formed.
Ernst & Young LLP
London
27 July 2022
CONDENSED CONSOLIDATED INCOME STATEMENT
GBPm
Six months ended 30 June
---------------------------------------------------------------------- ---- --------------------------
Note 2022 2021
---------------------------------------------------------------------- ---- ------------ ------------
Interest income calculated using the effective interest rate method 241.4 201.7
Other interest and similar income 27.3 7.2
---------------------------------------------------------------------- ---- ------------ ------------
Interest income and similar income 4 268.7 208.9
Interest expense and similar charges 4 (60.5) (59.5)
---------------------------------------------------------------------- ---- ------------ ------------
Net interest income 208.2 149.4
---------------------------------------------------------------------- ---- ------------ ------------
Fee and commission income 31.5 27.4
Fee and commission expense (16.1) (16.7)
---------------------------------------------------------------------- ---- ------------ ------------
Net fee and commission income 15.4 10.7
---------------------------------------------------------------------- ---- ------------ ------------
Other operating income (net) 5 10.6 23.5
---------------------------------------------------------------------- ---- ------------ ------------
Operating income 234.2 183.6
---------------------------------------------------------------------- ---- ------------ ------------
Operating expenses 6 (176.1) (164.9)
Net customer redress release 11 1.0 2.6
---------------------------------------------------------------------- ---- ------------ ------------
Total operating expenses (175.1) (162.3)
---------------------------------------------------------------------- ---- ------------ ------------
Operating profit before net credit impairment releases 59.1 21.3
---------------------------------------------------------------------- ---- ------------ ------------
Net credit impairment releases 8 2.8 0.1
---------------------------------------------------------------------- ---- ------------ ------------
Profit before tax 61.9 21.4
---------------------------------------------------------------------- ---- ------------ ------------
Income tax 7 (33.5) 23.5
---------------------------------------------------------------------- ---- ------------ ------------
Profit for the period 28.4 44.9
---------------------------------------------------------------------- ---- ------------ ------------
The results above wholly relate to continuing activities.
The profit for the financial period is wholly attributable to
equity shareholders.
Notes 1 to 17 form part of these interim condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
GBPm
Six months ended 30 June
2022 2021
--------------------------------------------------------------- ------- ------
Profit for the period 28.4 44.9
--------------------------------------------------------------- ------- ------
Items that may be recycled to profit or loss:
Changes in cash flow hedges:
Transfers from equity to income or expense (3.4) (5.4)
Income tax 1.9 -
Changes in fair value through other comprehensive income:
Net changes in fair value recognised directly in equity 66.5 16.3
Transfers from equity to income or expense (70.3) (20.1)
Income tax 1.3 0.8
Items that may not subsequently be recycled to profit or loss:
Changes in net retirement benefit asset:
Defined benefit plans (losses)/gains for the period (110.8) 13.2
Income tax 67.4 (36.9)
Other comprehensive expense for the period, net of income tax (47.4) (32.1)
--------------------------------------------------------------- ------- ------
Total comprehensive(expense)/income for the period (19.0) 12.8
--------------------------------------------------------------- ------- ------
Notes 1 to 17 form part of these interim condensed consolidated
financial statements.
CONDENSED CONSOLIDATED BALANCE SHEET
GBPm
30 June
Note 2022 31 December 2021
---------------------------------------------------------------- ---- -------- ----------------
Assets
Cash and balances at central banks 5,639.6 5,696.9
Loans and advances to banks 236.6 191.5
Loans and advances to customers 8 20,883.1 21,002.1
Fair value adjustments for hedged risk (303.0) (90.5)
Investment securities 9 1,181.8 1,201.4
Derivative financial instruments 398.0 248.5
Property, plant and equipment classified as held-for-sale 0.1 0.2
Equity shares 23.1 22.8
Investment properties 2.0 1.9
Other assets 23.4 12.7
Prepayments 26.1 20.3
Property, plant and equipment 20.9 22.2
Intangible assets 74.4 68.5
Right-of-use assets 37.0 46.9
Deferred tax assets 76.0 36.8
Net retirement benefit asset 12 735.6 841.1
---------------------------------------------------------------- ---- -------- ----------------
Total assets 29,054.7 29,323.3
---------------------------------------------------------------- ---- -------- ----------------
Liabilities
Deposits by banks 5,671.5 5,527.6
Customer accounts 20,581.2 21,135.9
Debt securities in issue 193.9 203.3
Fair value adjustments for hedged risk (23.6) (7.5)
Derivative financial instruments 112.7 148.2
Other liabilities 39.9 38.7
Accruals and deferred income 24.7 37.0
Provisions 11 25.3 33.9
Other borrowed funds 10 649.0 402.1
Lease liabilities 40.6 44.1
Current tax liabilities 0.2 -
Net retirement benefit liability 12 6.4 8.1
---------------------------------------------------------------- ---- -------- ----------------
Total liabilities 27,321.8 27,571.4
---------------------------------------------------------------- ---- -------- ----------------
Capital and reserves attributable to the Group's equity holders
Ordinary share capital 15 0.9 0.9
Share premium account 15 313.8 313.8
Retained earnings 1,974.4 1,946.0
Other reserves (556.2) (508.8)
---------------------------------------------------------------- ---- -------- ----------------
Total equity 1,732.9 1,751.9
---------------------------------------------------------------- ---- -------- ----------------
Total liabilities and equity 29,054.7 29,323.3
---------------------------------------------------------------- ---- -------- ----------------
Notes 1 to 17 form part of these interim condensed consolidated
financial statements.
Approved by the Board of The Co-operative Bank Holdings Limited
on 27 July 2022:
Bob Dench Nick Slape
Chair of the Board Chief Executive Officer
CONDENSED CONSOLIDATED STATEMENT OF CASHFLOWS
GBPm
Six months ended 30 June
------------------------------------------------------------------ --------------------------
2022 2021
------------------------------------------------------------------ ----------- -------------
Cash flows (used in)/from operating activities:
Profit before tax 61.9 21.4
Adjustments for non-cash movements:
Pension scheme adjustments (6.1) (2.4)
Net credit impairment releases (2.8) (0.1)
Depreciation, amortisation and impairment of property, equipment,
right-of-use assets and intangibles 17.0 19.6
Other non-cash movements including exchange rate movements 97.6 62.8
Changes in operating assets and liabilities:
Increase in deposits by banks 143.9 390.3
Increase in prepayments and accrued income (5.8) (10.8)
Decrease in accruals and deferred income (12.3) (2.9)
(Decrease)/increase in customer accounts (554.8) 959.9
Decrease in debt securities in issue (9.4) (2.6)
Increase in loans and advances to banks (13.4) (29.6)
Decrease/(increase) in loans and advances to customers 102.1 (1,746.4)
Net movement of other assets and other liabilities (12.8) 118.7
Income tax paid (1.8) -
------------------------------------------------------------------- ----------- -------------
Net cash flows used in operating activities (196.7) (222.1)
------------------------------------------------------------------- ----------- -------------
Cash flows (used in)/from investing activities:
Purchase of tangible and intangible assets (18.3) (13.3)
Purchase of investment securities (317.2) (445.7)
Proceeds from sale of property and equipment - 1.8
Proceeds from sale and maturity of investment securities 281.1 389.9
Dividends received 0.1 0.1
------------------------------------------------------------------- ----------- -------------
Net cash flows used in investing activities (54.3) (67.2)
------------------------------------------------------------------- ----------- -------------
Cash flows from/(used in) financing activities:
Proceeds from MREL issuance 248.4 -
Interest paid on Tier 2 notes and senior unsecured debt (18.5) (18.5)
Lease liability principal payments (4.5) (4.2)
------------------------------------------------------------------- ----------- -------------
Net cash flows from/(used in) financing activities 225.4 (22.7)
------------------------------------------------------------------- ----------- -------------
Net decrease in cash and cash equivalents (25.6) (312.0)
------------------------------------------------------------------- ----------- -------------
Cash and cash equivalents at the beginning of the period 5,717.5 4,229.5
------------------------------------------------------------------- ----------- -------------
Cash and cash equivalents at the end of the period 5,691.9 3,917.5
------------------------------------------------------------------- ----------- -------------
Comprising of:
------------------------------------------------------------------ ----------- -------------
Cash and balances with central banks 5,550.7 3,633.9
Loans and advances to banks 141.2 283.6
------------------------------------------------------------------- ----------- -------------
RECONCILIATION OF MOVEMENTS OF LIABILITIES TO CASHFLOWS ARISING
FROM FINANCING ACTIVITIES
GBPm
Six months ended 30 June 2022 Six months ended 30 June 2021
-------------------- ----------------------------------------------- -----------------------------------------------
Lease liabilities Other borrowed funds Total Lease liabilities Other borrowed funds Total
-------------------- ----------------- -------------------- ------ ----------------- -------------------- ------
Balance at the
beginning of the
period 44.1 402.1 446.2 53.6 408.2 461.8
-------------------- ----------------- -------------------- ------ ----------------- -------------------- ------
Changes from
financing cash
flows:
Proceeds from MREL
issuance - 248.4 248.4 - - -
Interest paid on
Tier 2 notes and
senior unsecured
debt - (18.5) (18.5) - (18.5) (18.5)
Lease liability
principal
payments (4.5) - (4.5) (4.2) - (4.2)
-------------------- ----------------- -------------------- ------ ----------------- -------------------- ------
Total changes from
financing cash
flows 39.6 632.0 671.6 49.4 389.7 439.1
-------------------- ----------------- -------------------- ------ ----------------- -------------------- ------
Other changes:
Interest payable
on lease
liabilities and
Tier 2 notes 0.7 22.0 22.7 0.7 18.4 19.1
Other non-cash
movements - (5.0) (5.0) - (2.4) (2.4)
Recognition of
lease liabilities 0.3 - 0.3 - - -
-------------------- ----------------- -------------------- ------ ----------------- -------------------- ------
Balance at the end
of the period 40.6 649.0 689.6 50.1 405.7 455.8
-------------------- ----------------- -------------------- ------ ----------------- -------------------- ------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
GBPm
Cash Defined
flow Capital Capital benefit
Six months ended Share Share FVOCI hedging redemption re-organisation pension Retained Total
30 June 2022 capital premium reserve reserve reserve reserve reserve earnings equity
----------------- -------- --------- --------- -------- ---------- --------------- -------- --------- -------
At 1 January 2022 0.9 313.8 2.9 14.7 - (1,011.4) 485.0 1,946.0 1,751.9
Total
comprehensive
(expense)/income
for the period - - (2.5) (1.5) - - (43.4) 28.4 (19.0)
----------------- -------- --------- --------- -------- ---------- --------------- -------- --------- -------
At 30 June 2022 0.9 313.8 0.4 13.2 - (1,011.4) 441.6 1,974.4 1,732.9
----------------- -------- --------- --------- -------- ---------- --------------- -------- --------- -------
Cash Defined
flow Capital Capital benefit
Six months ended Share Share FVOCI hedging redemption re-organisation pension Retained Total
30 June 2021 capital premium reserve reserve reserve reserve reserve earnings equity
----------------- -------- --------- --------- -------- ---------- --------------- -------- --------- -------
At 1 January 2021 0.9 313.8 4.8 22.5 410.0 1,737.5 395.1 (1,410.2) 1,474.4
Total
comprehensive
(expense)/income
for the period
Reserve
reorganisation - - (3.0) (5.4) - - (23.7) 44.9 12.8
----------------- -------- --------- --------- -------- ---------- --------------- -------- --------- -------
At 30 June 2021 0.9 313.8 1.8 17.1 410.0 1,737.5 371.4 (1,365.3) 1,487.2
----------------- -------- --------- --------- -------- ---------- --------------- -------- --------- -------
Cash Defined
flow Capital Capital benefit
Year ended 31 Share Share FVOCI hedging redemption re-organisation pension Retained Total
December 2021 capital premium reserve reserve reserve reserve reserve earnings equity
----------------- -------- --------- --------- -------- ---------- --------------- -------- --------- -------
At 1 January 2021 0.9 313.8 4.8 22.5 410.0 1,737.5 395.1 (1,410.2) 1,474.4
Total
comprehensive
(expense)/income
for the year - - (1.9) (7.8) - - 89.9 197.3 277.5
Reserve
reorganisation - - - - (410.0) (2,748.9) - 3,158.9 -
----------------- -------- --------- --------- -------- ---------- --------------- -------- --------- -------
At 31 December
2021 0.9 313.8 2.9 14.7 - (1,011.4) 485.0 1,946.0 1,751.9
----------------- -------- --------- --------- -------- ---------- --------------- -------- --------- -------
Notes 1 to 17 form part of these interim condensed consolidated
financial statements.
SELECTED NOTES TO THE FINANCIAL STATEMENTS
All amounts are stated in GBPm unless otherwise indicated
1. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
1.1 Basis of preparation
The Interim Financial Statements for the Group are for the six
month period ended 30 June 2022 and are unaudited. The Group
Interim Financial Statements have been prepared in accordance with
UK-adopted International Accounting Standard (IAS) 34 'Interim
Financial Reporting'.
The Group Interim Financial Statements comprise the consolidated
results and position of The Co-operative Bank Holdings Limited
(Holding Company) together with its subsidiaries (together, the
Group).
1.2 Going concern
IAS 1 (Presentation of Financial Statements) requires Directors
to make an assessment of a company's ability to continue as a going
concern, and whether it remains appropriate to adopt the going
concern basis of accounting in preparing the entity's financial
statements. IAS 1 states that the information should cover at least
12 months from the end of the reporting period but not be limited
to that period, and Financial Reporting Council (FRC) guidelines
state that the information should consider a period of at least 12
months from the date the financial statements are authorised for
issue. This assessment has considered information in respect of the
18-month period ending 31 December 2023 (the 'assessment
period').
When considering the going concern status of the Group, the
Directors have referenced the FRC published guidance on the Going
Concern Basis of Accounting and Reporting on Solvency and Liquidity
Risks (the '2016 Guidance').
The assessment has been considered against the backdrop of the
principal risks faced by the Group as outlined in the risk
management section, and included a detailed review of the forecast
profitability, liquidity, capital resources, capital adequacy
ratios and the associated binding minimum regulatory requirements
as set out in the most recent long-term forecast reviewed by the
Directors. Whilst the Directors consider threats to viability from
most of the principal risks to be remote, in recent periods the
Group has considered future compliance with minimum binding
regulatory capital requirements to be a key source of uncertainty.
These 'end-state requirements' (which exclude CRDIV and PRA
buffers) remain at TCR+GBP400m during the remainder of 2022 before
rising to two times TCR from 1 January 2023.
Following the successful issuance of GBP250m of MREL-qualifying
instruments in the first half of 2022 and six consecutive quarters
of profits, the Group's resilience against unexpected shocks has
improved further since the end of 2021 to the extent that it
expects that it could comfortably meet its end-state requirements
throughout the assessment period without any further capital
issuances.
Whilst the Group's capital levels are still sensitive to shocks
to macroeconomic factors (e.g. decreases in HPI inflating RWAs and
associated capital requirements) or the Group's own profitability
(thereby eroding capital resources), the degree of headroom is
considered sufficiently high that the risk of breaching
requirements is remote. Reverse stress testing was performed to
determine the level of HPI deterioration and/or one-off losses that
would need to occur in order for the Group to breach MREL minimums,
as outlined in the following table:
End-state breach HPI deterioration P&L charge Combined
------------------- ------------------ ----------- ----------------
No further capital 30% GBP314m 15% and GBP157m
issuance
------------------- ------------------ ----------- ----------------
The Group could mitigate the risk of non-compliance by
undertaking further capital issuances.
As such, the Directors do not consider there to be a material
uncertainty with regard to the Group's ability to remain compliant
with its minimum binding regulatory capital requirements. Liquidity
was considered as part of the assessment but due to the current and
projected levels of liquidity (both within the assessment period
and beyond) this has not been deemed a significant risk to the
Group's going concern status.
After considering the matters above, the Directors have a
reasonable expectation that the Group will continue as a going
concern with no material uncertainties. Accordingly, the accounts
for the period ended 30 June 2022 have been prepared on a going
concern basis.
1.3 Significant accounting policies
The accounting policies, presentation and methods of computation
are consistent with those applied by the Group in its audited 2021
Annual Report and Accounts, which were prepared in accordance with
UK-adopted international accounting standards and the provisions of
the Companies Act 2006.
1.4 Standards and interpretations issued
Information on pronouncements that will be relevant in future
periods is provided in the 2021 Annual Report and Accounts.
2. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
The preparation of financial information requires management to
make judgements and assumptions that affect the application of
accounting policies and the reported amounts of assets,
liabilities, income and expenses. Assumptions and estimates are
reviewed on an ongoing basis. Except as noted below, the accounting
policies, presentation and methods of computation of critical
accounting judgements and key sources of estimation uncertainty are
consistent with those applied by the Group in the 2021 Annual
Report and Accounts.
2.1 Loan impairment provisions
Further information on the Group's credit risk management
practices are outlined in the risk management section 2. The Group
has not significantly amended the nature of the judgements applied
in estimating credit losses from those disclosed by the Group in
its 2021 Annual Report and Accounts; however, certain key
estimation assumptions have changed in the Group's most recent
assessment of expected credit losses (ECL).
a) Collective impairment provisions - economic scenario
selection and weighting sensitivity
The Group's approach to scenario selection and weighting is
outlined in the explanatory information section 1.3.j.v of the
Group's 2021 Annual Report and Accounts. The scenarios and weights
used within the Group's ECL modelling process are shown below:
30 June 31 December
2022 2021
---------------------------- ------- -----------
Upside 30% 30%
Base 30% 30%
Downside 30% 30%
Severe downside (low rate) 5% 10%
Severe downside (high rate) 5% -
------------------------------- ------- -----------
The Group has introduced an additional downside economic
scenario reflecting a high interest rate stressed macroeconomic
environment, influenced by the rapid rate rises in the Bank of
England base rate that have been observed the first half of the
year and which the Group expects to continue.
The below table demonstrates how the modelled ECL would change
if 100% weighting was applied to each of the scenarios.
Core
-------------
Legacy
% applied & central
in model Retail SME items Total
--------------------- --------- -------- --- ---------- -----
Base 30% 8.5 0.8 1.2 10.5
Mild upside 30% 8.2 0.7 1.2 10.1
Mild downside 30% 9.1 0.9 1.3 11.3
Downside (low rate) 5% 10.2 1.1 1.4 12.7
Downside (high rate) 5% 10.7 1.1 1.4 13.2
--------------------- --------- -------- --- ---------- -----
Weighted average 100% 8.8 0.8 1.3 10.9
--------------------- --------- -------- --- ---------- -----
The staging of individual loans contributing to the ECLs within
the above table reflects the base case position only and no
allowances for stage transfers have been made in fully-weighted
alternative scenarios; these should therefore not be considered
reliable forecasts of expected losses under such economic
conditions. In practice, if any such scenario were experienced in
isolation it would be reasonable to expect customers to transfer
between stages, which would affect the total ECL. It should also be
noted that the above considers only modelled ECLs and not the
impact of any post-model adjustments (PMAs - expert overlays). In
practice, certain PMAs implemented by the Group may offset the
modelled movements above to reduce the sensitivity of the overall
ECL.
b) Collective impairment provisions - macroeconomic variables
and sensitivities
The key forecast variables used within the Group's range of
economic scenarios are depicted in the below table as the annual
and average over the five-year forecast period used within all
scenarios.
5 year
2022 2023 2024 2025 2026 average(4)
--------------------- ------ ------- ------ ---- ---- -----------
GDP (1)
Upside 3.9% 0.9% 0.9% 1.4% 1.1% 2.3%
Base 3.7% (0.2%) 0.3% 0.7% 0.8% 1.7%
Mild downside 3.4% (0.9%) 0.1% 0.4% 0.7% 1.4%
Downside (low rate) 3.2% (3.8%) (1.4%) 0.4% 0.7% 0.5%
Downside (high rate) 3.2% (3.8%) (1.4%) 0.4% 0.7% 0.5%
HPI (2)
Upside 8.2% 3.2% 1.5% 3.4% 3.4% 4.5%
Base 6.4% 1.6% 0.8% 1.7% 3.4% 3.4%
Mild downside 1.9% (6.6%) 1.5% 3.4% 3.4% 1.3%
Downside (low rate) (0.9%) (12.9%) 2.3% 5.2% 3.4% 0.1%
Downside (high rate) (0.9%) (12.9%) 2.3% 5.2% 3.4% 0.1%
Unemployment (3)
Upside 3.5% 3.8% 3.8% 3.8% 3.8% 3.7%
Base 3.6% 4.1% 4.1% 4.1% 4.1% 4.0%
Mild downside 4.5% 6.5% 6.0% 5.3% 4.5% 5.2%
Downside (low rate) 5.4% 9.0% 8.5% 7.3% 6.0% 7.0%
Downside (high rate) 5.4% 9.0% 8.5% 7.3% 6.0% 7.0%
---------------------- ------ ------- ------ ---- ---- -----------
1. Annual average YoY%
2. Year end %
3. Year end YoY%
4. Average of quarterly positions
The key changes to the base forecasts over those in use at 31
December 2021 are:
-- GDP - lower YoY growth throughout forecast period reflecting
the impact of the sustained inflationary pressures on cost of
living;
-- HPI - higher HPI growth in 2022 and 2023, but slowdown in HPI
growth in 2024 leading to lower YoY increases in the outer years of
the forecast; and
-- Unemployment - lower in 2022 but remains broadly stable and
consistent with previous forecasts in the outer years.
Sensitivities
The Group has not made any significant changes to its IFRS 9
models in the period, the sensitivities of which are consistent
with those disclosed by the Group in the 2021 Annual Report and
Accounts.
c) Collective impairment provisions - post-model adjustments
The Group applies PMAs to reflect risk characteristics for
assets subject to collective provisioning but for which a specific
risk characteristic is not captured within the collective models.
The Group reviews PMAs on a quarterly basis to determine whether
PMAs should be stood up, remeasured or retired. An overview of
material PMAs or PMA groups is disclosed below:
Core
-------------------------------- ----------- ------------ -----
Legacy
&
30 June 2022 Retail SME unallocated Total
-------------------------------- ------ --- ------------ -----
Historical data confidence PMAs 6.8 - 0.1 6.9
Platform PMA - - - -
COVID-19 & affordability PMAs 4.7 3.8 0.1 8.6
Other PMAs 2.1 0.8 0.3 3.2
--------------------------------- ------ --- ------------ -----
Total PMAs 13.6 4.6 0.5 18.7
--------------------------------- ------ --- ------------ -----
Core
-------------------------------- ----------- ------------ -----
Legacy
&
31 December 2021 Retail SME unallocated Total
-------------------------------- ------ --- ------------ -----
Historical data confidence PMAs - - - -
Platform PMA 16.2 - - 16.2
COVID-19 PMAs(1) 1.6 3.8 0.8 6.2
Other PMAs 0.2 0.6 2.0 2.8
--------------------------------- ------ --- ------------ -----
Total PMAs 18.0 4.4 2.8 25.2
--------------------------------- ------ --- ------------ -----
1. Excludes further uplifts within the Platform PMA due to the impacts of COVID-19.
-- Historical data confidence PMA - the Group considers its
secured model to understate the risk associated particularly with
its Platform (broker-led) portfolio because of the book's relative
immaturity and limited default experience and, as such, it
historically applied a post-model adjustment to increase the
overall ECL to a set coverage ratio. At 31 December 2021, this was
set at 10bps. The Group has now replaced this overlay with a suite
of more targeted adjustments to compensate for known limitations
with regard to model assumptions. Key components of this PMA are
uplifts to base and stressed model PDs and haircuts to collateral
valuations. The Group will monitor these to ensure they remain
appropriate.
-- COVID-19 & affordability PMAs - this category of PMAs
covers specific residual COVID-19-related risk and new emerging
risks driven by the impacts of inflationary pressures on the cost
of living. Staging and/or ECL coverage uplifts are applied via the
application of internally-derived methodologies to specific
customer cohorts based on shared risk characteristics. The main
PMAs that remain in place at 30 June 2022 are overlays for:
-- Retail affordability - reflecting that certain customers with
higher indebtedness levels may have greater susceptibility to
financial difficulty stemming from inflationary pressures;
-- Corporate 'at risk' sectors - reflecting that certain
business sectors are more exposed to the longer-term economic
impacts of COVID-19 and the cost of living crisis;
-- Failed guarantee claims - reflecting that in certain isolated
instances the Group may not successfully be able to claim on
guarantees under the government support schemes; and
-- Corporate real estate LGDs - stale security valuations with
the CRE portfolio may result in understated loss estimates.
The Group expects to reduce the levels of these PMAs as and when
inflationary pressures subside, there is evidence of real wage
growth and any arrears levels appear stable.
-- Other PMAs - the Group holds a small number of PMAs in
respect of data and/or model limitations. None of these are
individually significant, but notable PMAs include uplifts for
cladding and EPC remediation risk on the Group's customers. Such
PMAs will be removed as and when the risks are captured organically
within the models or any model limitations have been resolved.
d) Individual impairment provisions
As disclosed in the 2021 Annual Report and Accounts, the Group's
individual impairment provisions are not sensitive to economic
variables.
3. SEGMENTAL INFORMATION
The Group provides a wide range of banking services within the
UK. The Executive Committee (ExCo) has been determined to be the
chief operating decision-maker of the Group. The Group's operating
segments reflect its organisational and management structures in
place at the reporting date. ExCo reviews information from internal
reporting based on these segments in order to assess performance
and allocate resources. The segments are differentiated by whether
the customers are individuals or corporate entities. The operating
costs of all business functions are allocated to the
income-generating businesses. Treasury balances have not been
allocated to segments to maintain clarity on underlying customer
product balances.
The Group has re-presented its external segmental reporting to
align to its revised internal approach, which differentiates
between legacy and central items and unallocated (being items not
related to a function).
Core
-------
Six months ended 30 June 2022 Legacy & Central
Re-presented Retail SME Total Unallocated Group
------------------------------------------- ------- ------ ------- ------------------ ----------- -------
Net interest income 183.6 28.8 212.4 (4.2) - 208.2
Other operating income 12.1 9.0 21.1 0.3 - 21.4
------------------------------------------- ------- ------ ------- ------------------ ----------- -------
Operating income/(expense) 195.7 37.8 233.5 (3.9) - 229.6
Operating expenses (136.7) (30.0) (166.7) (2.1) (6.3) (175.1)
Net credit impairment releases/(charges) 1.5 (0.8) 0.7 2.1 - 2.8
Non-operating income - - - - 4.6 4.6
------------------------------------------- ------- ------ ------- ------------------ ----------- -------
Profit before tax 60.5 7.0 67.5 (3.9) (1.7) 61.9
------------------------------------------- ------- ------ ------- ------------------ ----------- -------
Core
-------
Six months ended 30 June 2021 Legacy & Central
Re-presented Retail SME Total Unallocated Group
------------------------------------------- ------- ------ ------- ------------------ ----------- -------
Net interest income 131.2 22.4 153.6 (4.2) - 149.4
Other operating income 10.6 8.0 18.6 - - 18.6
------------------------------------------- ------- ------ ------- ------------------ ----------- -------
Operating income/(expense) 141.8 30.4 172.2 (4.2) - 168.0
Operating expenses (126.5) (26.5) (153.0) (2.2) (7.1) (162.3)
Net credit impairment releases/(charges) 2.0 (0.9) 1.1 (1.0) - 0.1
Non-operating income - - - - 15.6 15.6
------------------------------------------- ------- ------ ------- ------------------ ----------- -------
Profit before tax 17.3 3.0 20.3 (7.4) 8.5 21.4
------------------------------------------- ------- ------ ------- ------------------ ----------- -------
The table below represents the reconciliation of the underlying
basis and the segmental note to the consolidated income statement.
The underlying basis is the basis on which information is presented
to the chief operating decision-maker and excludes the items below
which are included in the statutory results.
Removal of:
IFRS Volatile Strategic Underlying
Six months ended 30 June 2022 statutory items(1) projects Non recurring(2) basis
--------------------------------- ------------- ------------ --------- ------------------ ------------
Net interest income 208.2 - - - 208.2
Other operating income 26.0 (0.4) - (4.2) 21.4
--------------------------------- ------------- ------------ --------- ------------------ ------------
Operating income 234.2 (0.4) - (4.2) 229.6
Operating expenses (176.1) - 5.5 1.8 (168.8)
Net customer redress release 1.0 - - (1.0) -
Net credit impairment releases 2.8 - - - 2.8
--------------------------------- ------------- ------------ --------- ------------------ ------------
Profit before tax 61.9 (0.4) 5.5 (3.4) 63.6
--------------------------------- ------------- ------------ --------- ------------------ ------------
Cost:income ratio(3) 75% 74%
--------------------------------- ------------- ------------ --------- ------------------ ------------
1. In the period ended 30 June 2022, this comprises gain on
shares revaluation.
2. In the period ended 30 June 2022, this comprises gains on the
sale of a small legacy loan book, release of PPI provision and
other exceptional costs.
3. Cost:income ratio is calculated as (operating expenses + net
customer redress release)/(operating income).
Removal of:
Six months ended 30 June 2021 IFRS Volatile Strategic Underlying
Re-presented statutory items(1) projects Non recurring(2) basis
--------------------------------- ------------- ------------ --------- ------------------ ----------
Net interest income 149.4 - - - 149.4
Other operating income 34.2 (2.3) - (13.3) 18.6
--------------------------------- ------------- ------------ --------- ------------------ ----------
Operating income 183.6 (2.3) - (13.3) 168.0
Operating expenses (164.9) - 8.7 1.0 (155.2)
Net customer redress release 2.6 - - (2.6) -
Net credit impairment releases 0.1 - - - 0.1
--------------------------------- ------------- ------------ --------- ------------------ ----------
Profit before tax 21.4 (2.3) 8.7 (14.9) 12.9
--------------------------------- ------------- ------------ --------- ------------------ ----------
Cost:income ratio(3) 88% 92%
--------------------------------- ------------- ------------ --------- ------------------ ----------
1. In the period ended 30 June 2021, this comprises gain on
shares revaluation.
2. In the period ended 30 June 2021, this comprises refunds of
historical ATM business rates paid, release of PPI provision and
other exceptional costs.
3. Cost:income ratio is calculated as (operating expenses + net
customer redress release)/(operating income).
The table below represents the segmental analysis of assets and
liabilities.
Core
---------------------------
30 June 2022 Retail SME Total Legacy & central items Underlying basis
---------------------- -------- ------- -------- ---------------------- ----------------
Segment assets 19,771.5 392.6 20,164.1 8,890.6 29,054.7
Segment liabilities 17,064.9 3,438.0 20,502.9 6,818.9 27,321.8
---------------------- -------- ------- -------- ---------------------- ----------------
Core
---------------------------
31 December 2021 Retail SME Total Legacy & central items Underlying basis
---------------------- -------- ------- -------- ---------------------- ----------------
Segment assets 19,756.0 441.7 20,197.7 9,125.6 29,323.3
Segment liabilities 17,604.4 3,461.0 21,065.4 6,506.0 27,571.4
---------------------- -------- ------- -------- ---------------------- ----------------
4. NET INTEREST INCOME
Interest income and similar income
Six months ended 30 Six months ended 30
June 2022 June 2021
------------------------------ --------------------------------
Amortised Amortised
cost FVOCI Other Total cost FVOCI Other Total
-------------------------------------- --------- ----- ----- ----- --------- ----- ------ ------
On financial assets not at fair value
through profit or loss:
Loans and advances to customers 216.1 - - 216.1 196.3 - - 196.3
Loans and advances to banks 19.2 - - 19.2 1.8 - - 1.8
Investment securities 0.6 5.5 - 6.1 0.5 3.1 - 3.6
Net interest income on net
defined benefit pension asset - - 8.4 8.4 - - 4.5 4.5
-------------------------------------- --------- ----- ----- ----- --------- ----- ------ ------
235.9 5.5 8.4 249.8 198.6 3.1 4.5 206.2
-------------------------------------- --------- ----- ----- ----- --------- ----- ------ ------
On financial assets at fair value
through profit or loss:
Loans and advances to customers - - 5.1 5.1 - - 5.5 5.5
Net interest income/(expense)
on financial instruments hedging
assets - - 5.3 5.3 - - (20.0) (20.0)
Net interest income on financial
instruments not in a hedging
relationship - - 8.5 8.5 - - 17.2 17.2
-------------------------------------- --------- ----- ----- ----- --------- ----- ------ ------
Total net interest income 235.9 5.5 27.3 268.7 198.6 3.1 7.2 208.9
-------------------------------------- --------- ----- ----- ----- --------- ----- ------ ------
Interest expense and similar charges
Six months ended 30 Six months ended 30
June 2022 June 2021
------------------------- ---------------------------
Amortised Amortised
cost Other Total cost Other Total
--------------------------------------- --------- ----- ------ --------- ------ ------
On financial liabilities not
at fair value through profit
or loss:
Customer accounts (11.1) - (11.1) (17.4) - (17.4)
Subordinated liabilities, debt
securities in issue and other
deposits (43.2) - (43.2) (32.7) - (32.7)
Interest on lease liabilities - (0.7) (0.7) - (0.9) (0.9)
Net interest expense on unfunded
pension obligations - (0.1) (0.1) - (0.1) (0.1)
--------------------------------------- --------- ----- ------ --------- ------ ------
(54.3) (0.8) (55.1) (50.1) (1.0) (51.1)
--------------------------------------- --------- ----- ------ --------- ------ ------
On financial liabilities at fair value
through profit or loss:
Net interest income on financial
instruments hedging liabilities - 0.3 0.3 - 5.7 5.7
Net interest expense on financial
instruments not in a hedging
relationship - (5.7) (5.7) - (14.1) (14.1)
--------------------------------------- --------- ----- ------ --------- ------ ------
Total interest expense and similar
charges (54.3) (6.2) (60.5) (50.1) (9.4) (59.5)
--------------------------------------- --------- ----- ------ --------- ------ ------
5. OTHER OPERATING INCOME/EXPENSE (NET)
Six months ended 30
June
---------------------------------------------------------
2022 2021
--------------------------------------------------------- ----------- --------
Profit on sale of investment securities 0.1 0.9
Gain on sale of shares - 0.7
Profit on sale of loans and advances to customers 4.1 -
Fair value movement on loans and advances to customers
designated at fair value (10.1) (6.0)
Income from derivatives and hedge accounting 10.9 9.5
Income from assets and liabilities held at fair value
through profit or loss(1) 0.9 1.0
Foreign currency transactions 4.3 4.1
Exceptional refund of ATM rates(2) 0.1 13.3
Other operating income 0.3 -
--------------------------------------------------------- ----------- --------
10.6 23.5
--------------------------------------------------------- ----------- --------
1. Income from assets and liabilities held at fair value through
profit or loss of GBP0.9m (30 June 2021: GBP1.0m) include GBP0.3m
gain on equity shares (30 June 2021: GBP1.6m).
2. Refund of historical ATM business rates paid following the
Supreme Court ruling handed down in May 2020.
6. OPERATING EXPENSES
Six months ended 30
June
-------------------------------------------------
2022 2021
------------------------------------------------- ---------- ---------
Staff costs 69.9 61.7
Depreciation, amortisation and impairment(1) 17.0 19.6
Technology costs 23.6 24.4
Outsourced operations 32.6 29.1
Professional services and IT consultancy costs 14.4 9.8
Property costs 4.4 3.4
Credit checking and screening 4.0 2.5
Regulatory levies 1.9 1.9
Other expenses 8.3 12.5
-------------------------------------------------- ---------- ---------
176.1 164.9
------------------------------------------------- ---------- ---------
1. Mainly comprises amortisation of intangible assets of
GBP11.1m (2021: GBP13.0m).
7. INCOME TAX
Six months ended
30 June
-----------------------------
2022 2021
----------------------------- ------- ---------
Current tax charge 2.1 -
Deferred tax charge/(credit) 31.4 (23.5)
----------------------------- ------- ---------
Total tax charge/(credit) 33.5 (23.5)
----------------------------- ------- ---------
In addition to the above, included within other comprehensive
income is a deferred tax credit of GBP70.6m (2021: charge of
GBP36.1m).
The tax on the profit before tax differs from the theoretical
amount that would arise using the corporation tax rate in the UK as
follows:
Six months ended
30 June
------------------------------------------------------------
2022 2021
------------------------------------------------------------ -------- --------
Profit before tax 61.9 21.4
------------------------------------------------------------ -------- --------
Tax charge calculated at a rate of 19% (2021: 19%) 11.8 4.0
Effects of:
Impact of surcharge rate change on opening deferred tax 41.9 -
Movement in unrecognised deferred tax (16.1) (2.3)
Impact of surcharge on deferred tax (4.0) 0.7
Impact of corporation tax rate change on deferred tax (0.9) (25.9)
Adjustment in respect of prior period 0.5 -
Expenses not deductible for tax purposes 0.3 0.2
Non-taxable income - (0.2)
------------------------------------------------------------ -------- --------
Total tax charge/(credit) 33.5 (23.5)
------------------------------------------------------------ -------- --------
The movement in unrecognised deferred tax represents the
recognition of historical tax losses, previously derecognised, that
are now brought onto the balance sheet reflecting their expected
utilisation against future probable taxable profits. The Group has
unrecognised deferred tax assets totalling GBP444.2m (31 December
2021: GBP468.7m).
An increase in the UK corporation rate from 19% to 25%
(effective 1 April 2023) was substantively enacted on 24 May 2021.
This will increase the Group's future current tax charge
accordingly.
A bank corporation tax surcharge of 8% also applies to Bank
Company. On 27 October 2021, the government announced that the
banking surcharge will be reduced from a rate of 8% to 3%, and that
it will be chargeable on banking profits above GBP100m (previously
GBP25m). The changes will be effective from 1 April 2023 for
current tax, aligning with the already enacted rise in the main
rate of corporation tax, so that the combined rate of tax on
banking profits in excess of GBP100m will be 28%. The changes to
the banking surcharge were substantively enacted on 2 February
2022. This reduction in the surcharge rate has been reflected in
the balance sheet value of the deferred tax assets and liabilities
as at 30 June 2022.
Deferred tax has been calculated by reference to the appropriate
rate based on the forecast reversals of the related temporary
differences. The Group's effective tax rate remains difficult to
predict due to the movement in recognised deferred tax assets and
the effect of the changes in tax rates.
8. LOANS AND ADVANCES TO CUSTOMERS
Analysis of the balance sheet
30 June 2022 31 December 2021
------------------------------------------------------------------ ------------ ----------------
Gross loans and advances 20,915.8 21,039.5
Less: allowance for losses (32.7) (37.4)
------------------------------------------------------------------ ------------ ----------------
Total loans and advances to customers net of allowance for losses 20,883.1 21,002.1
------------------------------------------------------------------ ------------ ----------------
Loans and advances to customers include GBP105.5m (31 December
2021: GBP118.1m) of financial assets designated at fair value
through profit or loss to eliminate or significantly reduce a
measurement or recognition inconsistency; of these, GBP54.7m (31
December 2021: GBP56.0m) are secured by real estate collateral.
For stage allocation and analysis, refer to the credit risk
section of the risk management report.
Certain loans and advances to customers have been pledged by the
Group; see note 13 for further details on encumbered and pledged
assets.
Analysis of allowance for impairment losses
Retail SME Legacy & unallocated Total
------------------------------------------- ------ ----- -------------------- -----
At 1 January 2022 25.5 6.7 5.2 37.4
Changes arising from stage transfers:
To lifetime ECL (stage 1 to 2 or 3) 6.4 1.0 - 7.4
To credit impaired (stage 1 or 2 to 3) 1.5 0.3 (1.4) 0.4
To 12 month ECL (stage 2 or 3 to 1) (0.4) (0.4) - (0.8)
From credit impaired (stage 3 to 2) (0.1) - - (0.1)
------------------------------------------- ------ ----- -------------------- -----
Net changes arising from stage transfers 7.4 0.9 (1.4) 6.9
------------------------------------------- ------ ----- -------------------- -----
Other charges/(releases):
New assets originated or purchased 1.2 0.1 - 1.3
Other changes to risk parameters (1) (8.0) 0.2 1.2 (6.6)
Redemptions and repayments (1.7) (0.4) (0.2) (2.3)
------------------------------------------- ------ ----- -------------------- -----
Net other releases/(charges) (1.1) 0.8 (0.4) (0.7)
------------------------------------------- ------ ----- -------------------- -----
Assets written off (2.0) (0.3) (0.1) (2.4)
Portfolio sale - - (1.6) (1.6)
------------------------------------------- ------ ----- -------------------- -----
At 30 June 2022 22.4 7.2 3.1 32.7
------------------------------------------- ------ ----- -------------------- -----
1. Includes the impact of any asset sales
Analysis of income statement
Six months ended 30 June
---------------------------------------------------------------------------------------
2022 2021
--------------------------------------------------------------------------------------- ----------- -------------
Net other releases/(charges) 0.7 (0.4)
Amounts recovered against amounts previously written off 0.1 0.1
Adjustment to recognise interest on stage 3 assets based on their net carrying value 0.4 0.4
Financial guarantees impairment release 1.6 -
--------------------------------------------------------------------------------------- ----------- -------------
Net impairment releases for the period as shown in the income statement 2.8 0.1
--------------------------------------------------------------------------------------- ----------- -------------
9. INVESTMENT SECURITIES
Analysis of investment securities
30 June 2022 31 December 2021
--------------------------------------- ---------------------------------------
Amortised cost FVOCI FVTPL Total Amortised cost FVOCI FVTPL Total
---------------------------------- -------------- ------- ----- ------- -------------- ------- ----- -------
Investment securities(1)
(listed) 62.1 1,116.7 3.0 1,181.8 67.3 1,131.6 2.5 1,201.4
---------------------------------- -------------- ------- ----- ------- -------------- ------- ----- -------
1. Investment securities are shown net of impairment (nil for
the current and previous periods).
Movement in investment securities
30 June 2022 31 December 2021
--------------------------------------- ---------------------------------------
Amortised cost FVOCI FVTPL Total Amortised cost FVOCI FVTPL Total
---------------------------------- -------------- ------- ----- ------- -------------- ------- ----- -------
At the beginning of the period 67.3 1,131.6 2.5 1,201.4 77.4 1,067.6 3.5 1,148.5
Acquisitions - 317.2 - 317.2 - 873.2 - 873.2
Disposals and maturities (5.2) (275.8) - (281.0) (10.1) (763.8) - (773.9)
FVOCI - (3.9) - (3.9) - (2.3) - (2.3)
Fair value through profit or
loss - (53.4) 0.5 (52.9) - (42.7) (1.0) (43.7)
Amortisation - (0.6) - (0.6) - (0.3) - (0.3)
Movement in interest accrual - 1.6 - 1.6 - (0.1) - (0.1)
---------------------------------- -------------- ------- ----- ------- -------------- ------- ----- -------
At the end of the period 62.1 1,116.7 3.0 1,181.8 67.3 1,131.6 2.5 1,201.4
---------------------------------- -------------- ------- ----- ------- -------------- ------- ----- -------
Certain investment securities have been pledged or transferred
by the Group; see note 13 for further details on encumbered and
pledged assets.
Analysis of investment securities by issuer
30 June 2022 31 December 2021
---------------------------------------------------- ------------ ----------------
Investment securities issued by public bodies:
Government securities 334.3 442.2
Other public sector securities 131.9 140.8
---------------------------------------------------- ------------ ----------------
Total investment securities issued by public bodies 466.2 583.0
---------------------------------------------------- ------------ ----------------
Other debt securities:
Other floating rate notes 614.1 511.8
Mortgage backed securities 101.5 106.6
---------------------------------------------------- ------------ ----------------
Total other debt securities 715.6 618.4
---------------------------------------------------- ------------ ----------------
Total investment securities 1,181.8 1,201.4
---------------------------------------------------- ------------ ----------------
Other floating rate notes (FRNs) are sterling-denominated, with
contractual maturities ranging from one to two years, to six years
from the balance sheet date.
10. OTHER BORROWED FUNDS
Issue Call Maturity
date date date 30 June 2022 31 December 2021
----------------------------- ----------------- ----------------- ----------------- ------------ ----------------
Tier 2-qualifying
liabilities
----------------------------- ----------------- ----------------- ----------------- ------------ ----------------
9.5% fixed rate reset
callable subordinated
notes
(GBP200m) 25 April 2019 25 April 2024 25 April 2029 200.0 200.0
----------------------------- ----------------- ----------------- ----------------- ------------ ----------------
MREL-qualifying liabilities
----------------------------- ----------------- ----------------- ----------------- ------------ ----------------
9.0% fixed rate reset
callable senior unsecured
notes (GBP200m) 27 November 2020 27 November 2024 27 November 2025 200.0 200.0
----------------------------- ----------------- ----------------- ----------------- ------------ ----------------
6.0% fixed rate reset
callable notes (GBP250m) 6 April 2022 6 April 2026 6 April 2027 250.0 -
----------------------------- ----------------- ----------------- ----------------- ------------ ----------------
Fixed rate subordinated notes 650.0 400.0
Issue costs, discounts and accrued interest 4.7 2.3
Hedged risk adjustment (5.7) (0.2)
-------------------------------------------------------------------------------------- ------------ ----------------
649.0 402.1
----------------------------------------------------------------------------------- ------------ ----------------
Other borrowed funds comprise various subordinated liabilities
issued to meet the Group's Minimum Requirements for own funds and
Eligible Liabilities and Tier 2 capital requirements. The Tier 2
qualifying liabilities rank junior to the MREL-qualifying
liabilities, which rank pari passu amongst themselves. All
instruments are listed on the London Stock Exchange. New
MREL-qualifying instruments of GBP250.0m were issued during the
period.
11. PROVISIONS
Conduct /
Property PPI legal Other Total
-------------------------------------- -------- ----- --------- ------ ------
At 1 January 2022 15.2 1.0 0.1 17.6 33.9
Provided in the period:
Operating expenses (3.4) - - 9.1 5.7
Net customer redress release - (1.0) - - (1.0)
Utilised during the period (1.7) - - (11.6) (13.3)
--------------------------------------- -------- ----- --------- ------ ------
At 30 June 2022 10.1 - 0.1 15.1 25.3
--------------------------------------- -------- ----- --------- ------ ------
Amounts falling due within one year 3.8 - 0.1 12.0 15.9
Amounts falling due after one year 6.3 - - 3.1 9.4
--------------------------------------- -------- ----- --------- ------ ------
Total provisions 10.1 - 0.1 15.1 25.3
--------------------------------------- -------- ----- --------- ------ ------
Property
The Group has a number of leasehold properties. Where a property
is partially or fully vacated prior to the end of the lease term,
the associated right-of-use assets are impaired and provisions are
recognised for expected outflows during the remaining periods of
the leases. In addition, dilapidation provisions are recorded to
the extent that the Group has incurred an obligation to restore a
property to a defined state of repair and/or any dilapidation
clauses within the contract have been invoked.
Payment Protection Insurance (PPI)
The Group has concluded its remediation activity under its
legacy PPI redress programme and has released the remaining
provision.
Other
Other provisions include a net charge of GBP9.1m (30 June 2021:
GBP3.5m) which mainly comprises movements in the provisions for
employee variable pay.
12. RETIREMENT BENEFITS
Details of the pension schemes operated by the Group are
provided in the 2021 Annual Report and Accounts. The amounts
recognised in the balance sheet in relation to defined benefit
schemes are as follows:
31 December 2021 Movement 30 June 2022
---------------------------------------------- ---------------- -------- ------------
Retirement benefit net surplus 841.1 (105.5) 735.6
Retirement benefit liabilities (8.1) 1.7 (6.4)
-------------------------------------------------
Total amounts recognised in the balance sheet 833.0 (103.8) 729.2
Represented by:
Funded DB schemes (Pace DB and BPS) 841.1 (105.5) 735.6
Unfunded DB schemes (8.1) 1.7 (6.4)
-------------------------------------------------
Total amounts recognised in the balance sheet 833.0 (103.8) 729.2
-------------------------------------------------
The present value of the defined benefit obligation as at 30
June 2022 has been derived using assumptions that are consistent
with those used for the 31 December 2021 value, updated for market
conditions at the reporting date. The decrease in the net asset was
primarily driven by increases in gilt yields and long-term
inflation. The schemes employ a liability-driven investment
strategy with the objective of hedging the impact to liabilities on
the technical provisions basis of changes in interest rates and
inflation. Accordingly, on an accounting basis the reduction in
assets exceeds the reduction in accounting liabilities, driving a
reduction in the net surplus position. These increases have been
partially offset by net interest income earned and expense
reimbursement contributions to BPS.
13. CONTINGENT LIABILITIES, CONTRACTUAL COMMITMENTS AND GUARANTEES
The tables below provide the contractual amounts of contingent
liabilities and commitments. The contractual amounts indicate the
volume of business outstanding at the balance sheet date and do not
represent amounts at risk.
30 June 2022 31 December 2021
Contractual amount Risk-weighted amount Contractual amount Risk-weighted amount
Contingent liabilities arising
from customer transactions:
Guarantees and irrecoverable
letters of credit 4.2 2.1 4.1 2.0
Other commitments arising from
customer transactions:
Undrawn formal standby
facilities, credit lines and
other commitments to lend
(includes revocable
and irrevocable
commitments)(1) 1,657.5 260.4 1,960.5 383.7
1,661.7 262.5 1,964.6 385.7
1. Revocable commitments which represent unused credit card
limits of GBP868.9m (31 December 2021: GBP891.0m).
Other contingent liabilities, contractual commitments and
guarantees
There have been no significant changes to the position of the
Group's other contingent liabilities, contractual commitments and
guarantees as disclosed in the 2021 Annual Report and Accounts.
On 15 June 2022, a judicial review hearing took place in
relation to a claim issued by a Group subsidiary against a
jurisdiction decision of the Financial Ombudsman Service regarding
a complaint about historical variations to that subsidiary's
standard variable rate. The judgement was published on 27 July and
the Group's application for judicial review was dismissed.
As this was a case concerning a decision on whether or not the
events are within the FOS's jurisdiction and not on the merits of
the underlying complaint, it is still not currently possible to
predict the scope and ultimate outcome on the Group. This is only
the first in a series of contingent events that would need to
happen to result in adverse outcomes, in order for the Group to be
exposed to any significant liability. Given the early stages of
this process, there is no current obligation under accounting
standards to provide an estimate of any potential financial impact.
The Group remains satisfied that these historical variations were
applied fairly and in accordance with the terms and conditions of
the mortgage contract.
Encumbered and pledged assets
The Group pledges certain assets as collateral to third parties
as part of its day-to-day activities. The carrying value of amounts
pledged to each counterparty types, as well as a high level summary
of the terms of the arrangements, are provided below.
Cash and
balances Loans and Loans and
at central advances advances Investment
30 June 2022 banks to banks to customers securities Total
TFSME - - 7,012.3 - 7,012.3
Pension scheme contingent
security - 64.6 481.1 - 545.7
Payment scheme collateral 280.0 51.0 48.9 41.7 421.6
Securitisations - 10.5 222.9 - 233.4
Interest rate swap
collateral - 28.0 - 146.7 174.7
Other - 28.1 - 144.6 172.7
Total assets pledged 280.0 182.2 7,765.2 333.0 8,560.4
Cash and
balances Loans and Loans and
at central advances advances Investment
31 December 2021 banks to banks to customers securities Total
TFSME - - 7,103.9 - 7,103.9
Pension scheme contingent
security - 51.6 492.4 - 544.0
Payment scheme collateral 280.0 49.5 48.8 41.8 420.1
Securitisations - 12.1 246.6 - 258.7
Interest rate swap
collateral - 2.8 - 156.1 158.9
Other 30.2 146.3 176.5
Total assets pledged 280.0 146.2 7,891.7 344.2 8,662.1
-- Term Funding Scheme with incentives for SME - residential
mortgages pledged as collateral against the Group's drawings from
the Bank of England's Term Funding Scheme.
-- Pension scheme contingent security - contingent security
provided by the Group to its defined benefit pension schemes.
Security has been pledged primarily in the form of retained
securitisation notes (which do not appear on the Group's
consolidated balance sheet), cash generated from the amortisation
of the notes, which can be substituted for further high-quality
investment securities, and cash held in custody for the benefit of
the Pace scheme in lieu of deficit recovery contributions. These
assets can only be accessed by the trustees in the event that the
Group was unable to meet future contribution obligations, as may be
agreed with the relevant scheme trustee, insolvency or the failure
to adhere to the terms of the security deeds.
-- Payment scheme collateral - collateral posted as part of the
Group's involvement in transactional payment schemes, including
Visa and BACS.
-- Securitisations - residential mortgages pledged as collateral
against investment securities issued by Group securitisation
subsidiaries. Noteholders would have recourse to the underlying
assets in the event of the Group's default. The Group may issue
investment securities from the securitisations externally to
investors for liquidity purposes, or may retain these internally to
be used as collateral in other arrangements. Where such securities
are retained internally, they are eliminated on consolidation and
do not appear on the Group's balance sheet.
-- Interest rate swap collateral - collateral posted by the
Group against derivative contract exposures as part of its interest
rate risk hedging activities.
-- Other - primarily relates to investment securities pledged to
cover essential operational continuity costs that would be incurred
if the Group were to be put into resolution.
Transferred assets not derecognised
In certain circumstances the Group sells assets to third parties
in arrangements where the risk and reward has not been fully
transferred. In these instances, the Group retains the asset on its
balance sheet, but reflects a liability to the third party for
amount due under the arrangement. These primarily rate to
repurchase agreements (repos) and are quantified below:
30 June 2022 31 December 2021
Assets not Associated liabilities Assets not Associated liabilities
derecognised derecognised
Repurchase
agreements
Loans and advances
to customers - - 6.3 -
Investment
securities 186.9 - 301.0 -
Deposits by banks - 185.4 - 304.5
Total 186.9 185.4 307.3 304.5
Unconsolidated structured entities
Details of the interests in unconsolidated structured entities
are disclosed in note 36 of the 2021 Annual Report and Accounts,
and there has been no significant change in the nature of the
transactions in these entities since this was published.
14. RELATED PARTY TRANSACTIONS
During the period to 30 June 2022 there have been no changes to
the nature of the related party transactions disclosed in note 32
of the 2021 Annual Report and Accounts that would materially affect
the position or performance of the Group.
15. SHARE CAPITAL
30 June 2022 31 December 2021
No. of shares (millions) Value No. of shares (millions) Value
------------------------ ------------------------
Share capital allotted, called up and fully paid
At the beginning and end of the period 9,029.1 0.9 9,029.1 0.9
Share premium account
At the beginning and end of the period 313.8 313.8
------------------------ ----- ------------------------ -----
There are 9,029,130,200 A shares (2021: 9,029,130,200) and 83 B
shares (2021: 83) in The Co-operative Bank Holdings Limited. The
holders of the ordinary A shares do not hold any voting rights but
are entitled to participate in distributions and to receive a
dividend on liquidation. The B shareholders have one vote for every
share held and also benefit from certain governance, notification
and approval rights with respect to the Holding Company, but have
no rights to distributions, other than on exit in an amount of
GBP25.0m in aggregate, subject to achieving a minimum valuation
threshold.
16. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
The methodology and assumptions for determining the fair value
of financial assets and liabilities are consistent with those
disclosed in the 2021 Annual Report and Accounts.
Balance sheet classification and measurement category
The tables below analyse the balance sheet carrying values of
financial assets and liabilities by classification.
Measured at fair value
FVTPL - Derivatives
Amortised FVTPL - mandatorily in a hedging
30 June 2022 cost FVOCI designated measured relationship Total
Financial assets
Cash and balances at central banks 5,639.6 - - - - 5,639.6
Loans and advances to banks 236.6 - - - - 236.6
Loans and advances to customers 20,776.9 - 105.5 0.7 - 20,883.1
Investment securities 62.1 1,116.7 - 3.0 - 1,181.8
Derivative financial instruments - - - 72.6 325.4 398.0
Equity shares - - - 23.1 - 23.1
Other assets 21.7 - - - - 21.7
Total financial assets 26,736.9 1,116.7 105.5 99.4 325.4 28,383.9
Financial liabilities
Deposits by banks 5,671.5 - - - - 5,671.5
Customer accounts 20,581.2 - - - - 20,581.2
Debt securities in issue 193.9 - - - - 193.9
Derivative financial instruments - - - 73.0 39.7 112.7
Other borrowed funds 649.0 - - - - 649.0
Other liabilities 37.1 - - - - 37.1
Total financial liabilities 27,132.7 - - 73.0 39.7 27,245.4
All other balance sheet categories represent non-financial
assets and liabilities.
Measured at fair value
FVTPL - Derivatives
Amortised FVTPL - mandatorily in a hedging
31 December 2021 cost FVOCI designated measured relationship Total
Financial assets
Cash and balances at central banks 5,696.9 - - - - 5,696.9
Loans and advances to banks 191.5 - - - - 191.5
Loans and advances to customers 20,884.0 - 117.4 0.7 - 21,002.1
Investment securities 67.3 1,131.6 - 2.5 - 1,201.4
Derivative financial instruments - - - 102.8 145.7 248.5
Equity shares - - - 22.8 - 22.8
Other assets 11.4 - - - - 11.4
Total financial assets 26,851.1 1,131.6 117.4 128.8 145.7 28,374.6
Financial liabilities
Deposits by banks 5,527.6 - - - - 5,527.6
Customer accounts 21,135.9 - - - - 21,135.9
Debt securities in issue 203.3 - - - - 203.3
Derivative financial instruments - - - 111.1 37.1 148.2
Other borrowed funds 402.1 - - - - 402.1
Other liabilities 36.1 - - - - 36.1
Total financial liabilities 27,305.0 - - 111.1 37.1 27,453.2
Valuation of financial assets and liabilities measured at fair
value
The carrying values of financial assets and liabilities measured
at fair value are analysed in the following tables by the three
level fair value hierarchy defined as follows:
-- Level 1 - Quoted market prices in active markets;
-- Level 2 - Valuation techniques using observable inputs; and
-- Level 3 - Valuation techniques using unobservable inputs.
Fair value at end of the reporting period using:
30 June 2022 Category Level 1 Level 2 Level 3 Total
Non-derivative financial
assets
Loans and advances to
customers FVTPL - designated - 104.2 1.3 105.5
Loans and advances to
customers FVTPL - mandatorily measured - - 0.7 0.7
Investment securities FVOCI 1,090.5 - 26.2 1,116.7
Investment securities FVTPL - mandatorily measured - - 3.0 3.0
Equity shares FVTPL - mandatorily measured 0.3 - 22.8 23.1
Derivative financial assets - 398.0 - 398.0
Non-financial assets:
Investment properties - - 2.0 2.0
Total assets carried at fair value 1,090.8 502.2 56.0 1,649.0
Derivative financial
liabilities - - - -
Total liabilities carried at fair value - 112.7 - 112.7
Fair value at end of the reporting period using:
31 December 2021 Category Level 1 Level 2 Level 3 Total
Non-derivative financial
assets
Loans and advances to
customers FVTPL - designated - 116.0 1.4 117.4
Loans and advances to
customers FVTPL - mandatorily measured - - 0.7 0.7
Investment securities FVOCI 1,104.0 - 27.6 1,131.6
Investment securities FVTPL - mandatorily measured - - 2.5 2.5
Equity shares FVTPL - mandatorily measured 0.3 - 22.5 22.8
Derivative financial assets - 248.5 - 248.5
Non-financial assets:
Investment properties - - 1.9 1.9
Total assets carried at fair value 1,104.3 364.5 56.6 1,525.4
Derivative financial liabilities - 148.2 - 148.2
Total liabilities carried at fair value - 148.2 - 148.2
Key elements of the valuation techniques, inputs and assumptions
used in measuring the fair value of level 2 and 3 financial assets
are as follows:
-- Loans and advances to customers
Loans and advances to customers primarily comprise of corporate
loans of GBP101.1m as at 30 June 2022 (31 December 2021: GBP110.8m)
which are fair valued through profit or loss using observable
inputs. Loans held at fair value are valued at the sum of all
future expected cash flows, discounted using a yield curve based on
observable market inputs.
-- Derivative financial instruments
Over-the-counter (i.e. non-exchange traded) derivatives are
valued using valuation models which are based on observable market
data. Valuation models calculate the present value of expected
future cash flows, based upon 'no arbitrage' principles. The Group
enters into vanilla foreign exchange and interest rate swap
derivatives, for which modelling techniques are standard across the
industry. Examples of inputs that are generally observable include
foreign exchange spot and forward rates, and benchmark interest
rate curves.
-- Investment securities
Investment securities comprise of RMBS of GBP26.2m (FVOCI) and
GBP3.0m (FVTPL - mandatorily measured) as at 30 June 2022 (31
December 2021: FVOCI: GBP27.6m and FVTPL GBP2.5m). An independent
third party valuation agent is used to provide prices for the rated
RMBS obtained from large financial institutions. These prices are
indicative values only and do not represent an offer to purchase
the securities. These RMBS represent the Group's interests in
unconsolidated structured entities.
A 1% increase or decrease in the price of the notes will result
in the value increasing or decreasing by approximately GBP292k
respectively.
-- Equity shares
Equity shares classified as FVTPL - mandatorily measured include
GBP22.3m of US Dollar-denominated convertible preference shares in
Visa Inc., with any movements in fair value being recognised
through profit or loss. The fair value of the Visa Inc. shares has
been calculated by taking the period end NYSE share price and
discounting for illiquidity and clawback. If the illiquidity
premium to the discount rate was increased by an absolute 10%, it
would result in a reduction in the overall fair value of the equity
shares of GBP3.2m as at 30 June 2022.
-- Investment properties
Investment properties are valued by using recent valuations of
individual assets within the portfolio, index linked to the balance
sheet date using the relevant house price index.
Movements in fair values of instruments with significant
unobservable inputs (level 3) were:
Sales,
Fair value Purchases transfers Fair value
at and out and Other Income at
31 December 2021 transfers in repayments comprehensive income statement 30 June 2022
Loans and advances
to customers 2.1 - (0.1) - - 2.0
Investment
securities 30.1 - (1.1) (0.3) 0.5 29.2
Equity shares 22.5 - - - 0.3 22.8
Investment
properties 1.9 - - - 0.1 2.0
56.6 - (1.2) (0.3) 0.9 56.0
Fair values of financial assets and liabilities not carried at
fair value
The carrying values of financial assets and liabilities measured
at amortised cost are analysed in the following tables by the three
level fair value hierarchy set out above.
Fair value
Items where
Total fair value
carrying approximates
30 June 2022 value Level 1 Level 2 Level 3 carrying value Total
--------- ------- ------- --------
Financial assets
Cash and balances at central banks 5,639.6 - - - 5,639.6 5,639.6
Loans and advances to banks 236.6 - - - 236.6 236.6
Loans and advances to customers 20,776.9 - - 19,435.9 850.1 20,286.0
Investment securities 62.1 - - 62.8 - 62.8
Other assets 21.7 - - - 21.7 21.7
Financial liabilities
Deposits by banks 5,671.5 - 5,396.5 - 273.8 5,670.3
Customer accounts 20,581.2 - - 1,601.8 18,959.7 20,561.5
Debt securities in issue 193.9 - - 194.1 - 194.1
Other borrowed funds 649.0 - 645.3 - - 645.3
Other liabilities 37.1 - - - 37.1 37.1
Fair value
Items where
Total fair value
carrying approximates
31 December 2021 value Level 1 Level 2 Level 3 carrying value Total
------- ------- --------
Financial assets
Cash and balances at central banks 5,696.9 - - - 5,696.9 5,696.9
Loans and advances to banks 191.5 - - - 191.5 191.5
Loans and advances to customers 20,884.0 - - 20,042.5 810.3 20,852.8
Investment securities 67.3 - - 69.1 - 69.1
Other assets 11.4 - - - 11.4 11.4
Financial liabilities
Deposits by banks 5,527.6 - 5,504.5 - 21.6 5,526.1
Customer accounts 21,135.9 - - 2,099.6 19,035.6 21,135.2
Debt securities in issue 203.3 - - 205.1 - 205.1
Other borrowed funds 402.1 - 448.7 - - 448.7
Other liabilities 36.1 - - - 36.1 36.1
--------- ------- --------
There were no transfers between level 1, 2 and 3 during the
period.
17. EVENTS AFTER THE BALANCE SHEET DATE
On 27 July 2022 the High Court published a judgement dismissing
the Group's application for judicial review of the FOS's
jurisdiction decision in relation to a complaint from a mortgage
customer, for which the hearing took place on 15 June 2022. There
is no current obligation under accounting standards to provide an
estimate of any potential financial impact and therefore the
financial statements have not been adjusted. Further disclosure
regarding this matter is made in note 13 to the condensed
consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements with
respect to the business, strategy and plans of the Group and its
current targets, goals and expectations relating to its future
financial condition and performance, developments and/or prospects.
Forward-looking statements sometimes can be identified by the use
of words such as 'may', 'will', 'seek', 'continue', 'aim',
'anticipate', 'target', 'projected', 'expect', 'estimate',
'intend', 'plan', 'goal', 'believe', 'achieve', 'predict', 'should'
or in each case, by their negative or other variations or
comparable terminology, or by discussion of strategy, plans,
objectives, goals, future events or intentions.
Examples of such forward-looking statements include, without
limitation, statements regarding the future financial position of
the Group and its commitment to its plan and other statements that
are not historical facts, including statements about the Group or
its Directors' and/or management's beliefs and expectations. Any
such forward-looking statements are not a reliable indicator of
future performance, as they may involve significant stated or
implied assumptions and subjective judgements, which may or may not
prove to be correct. There can be no assurance that any of the
matters set out in forward-looking statements are attainable, will
actually occur, will be realised, or are complete or accurate. Past
performance is not necessarily indicative of future results.
Differences between past performance and actual results may be
material and adverse.
For these reasons, recipients should not place reliance on, and
are cautioned about relying on, forward-looking statements as
actual achievements, financial condition, results or performance
measures could differ materially from those contained in the
forward-looking statement. By their nature, forward-looking
statements involve known and unknown risks, uncertainties and
contingencies because they are based on current plans, estimates,
targets, projections, views and assumptions and are subject to
inherent risks, uncertainties and other factors both external and
internal relating to the Group's plan, strategy or operations, many
of which are beyond the control of the Group, which may result in
it not being able to achieve the current targets, predictions,
expectations and other anticipated outcomes expressed or implied by
these forward-looking statements. In addition, certain of these
disclosures are dependent on choices relying on key model
characteristics and assumptions and are subject to various
limitations, including assumptions and estimates made by
management. No representations or warranties, expressed or implied,
are given by or on behalf of the Group as to the achievement or
reasonableness of any projections, estimates, forecasts, targets,
prospects or returns contained herein. Accordingly, undue reliance
should not be placed on forward-looking statements.
Any forward-looking statements made in this document speak only
as of the date of this document and it should not be assumed that
these statements have been or will be revised or updated in the
light of new information or future events and circumstances arising
after today. The Group expressly disclaims any obligation or
undertaking to provide or release publicly any updates or revisions
to any forward-looking statements contained in this document as a
result of new information or to reflect any change in the
expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based,
except as required under applicable law or regulation.
- END -
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END
IR EANXXAEAAEFA
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