TIDMOSB
OneSavings Bank plc
Interim report for the six months ended 30 June 2023
LEI: 213800WTQKOQI8ELD692
OneSavings Bank plc
Interim report for the six months ended 30 June 2023
OneSavings Bank plc (OSB), the specialist lending and retail
savings group, announces today its results for the six months ended
30 June 2023.
OSB is a wholly-owned subsidiary of OSB GROUP PLC (OSBG). OSBG
has prepared its own interim report for the period ended 30 June
2023 which includes the results for OSB and its subsidiaries (the
Group) and was published on 10 August 2023. OSB is also required to
publish an interim report due to its listed debt.
Following the Combination with Charter Court Financial Services
Group plc (CCFS) on 4 October 2019, this press release includes
results on an underlying basis, in addition to the statutory basis,
which Management believe provide a more consistent basis for
comparing the Group's results between financial periods. Underlying
results exclude integration costs and other acquisition-related
items (see the reconciliation in the Financial review).
Enquiries:
OneSavings Bank plc Brunswick Group
Alastair Pate, Investor Relations Robin Wrench/Simone Selzer
t: 01634 838973 t: 020 7404 5959
About OneSavings Bank plc
OSB began trading as a bank on 1 February 2011 and was admitted
to the main market of the London Stock Exchange in June 2014
(OSB.L). OSB joined the FTSE 250 index in June 2015. On 4 October
2019, OSB acquired Charter Court Financial Services Group plc
(CCFS) and its subsidiary businesses. On 30 November 2020, OSB
GROUP PLC became the listed entity and holding company for the
Group. The Group provides specialist lending and retail savings and
is authorised by the Prudential Regulation Authority, part of the
Bank of England, and regulated by the Financial Conduct Authority
and Prudential Regulation Authority. The Group reports under two
segments, OneSavings Bank and Charter Court Financial Services.
OneSavings Bank (OSB)
OSB primarily targets market sub-sectors that offer high growth
potential and attractive risk-adjusted returns in which it can take
a leading position and where it has established expertise,
platforms and capabilities. These include private rented sector
Buy-to-Let, commercial and semi-commercial mortgages, residential
development finance, bespoke and specialist residential lending,
secured funding lines and asset finance.
OSB originates mortgages organically via specialist brokers and
independent financial advisers through its specialist brands
including Kent Reliance for Intermediaries and InterBay Commercial.
It is differentiated through its use of highly skilled, bespoke
underwriting and efficient operating model.
OSB is predominantly funded by retail savings originated through
the long-established Kent Reliance name, which includes online and
postal channels as well as a network of branches in the South East
of England. Diversification of funding is currently provided by
securitisation programmes and the Bank of England's Term Funding
Scheme with additional incentives for SMEs.
Charter Court Financial Services Group (CCFS)
CCFS focuses on providing Buy-to-Let and specialist residential
mortgages, mortgage servicing, administration and retail savings
products. It operates through its brands: Precise Mortgages and
Charter Savings Bank.
It is differentiated through risk management expertise and
best-of-breed automated technology and systems, ensuring efficient
processing, strong credit and collateral risk control and speed of
product development and innovation. These factors have enabled
strong balance sheet growth whilst maintaining high credit quality
mortgage assets.
CCFS is predominantly funded by retail savings originated
through its Charter Savings Bank brand. Diversification of funding
is currently provided by securitisation programmes and the Bank of
England's Term Funding Scheme with additional incentives for
SMEs.
Important disclaimer
This document should be read in conjunction with any other
documents or announcements distributed by OneSavings Bank plc (OSB)
through the Regulatory News Service (RNS). This document is not
audited and contains certain forward-looking statements with
respect to the business, strategy and plans of OSB, its current
goals, beliefs, intentions, strategies and expectations relating to
its future financial condition, performance and results. Such
forward-looking statements include, without limitation, those
preceded by, followed by or that include the words 'targets',
'believes', 'estimates', 'expects', 'aims', 'intends', 'will',
'may', 'anticipates', 'projects', 'plans', 'forecasts', 'outlook',
'likely', 'guidance', 'trends', 'future', 'would', 'could',
'should' or similar expressions or negatives thereof but are not
the exclusive means of identifying such statements. Statements that
are not historical facts, including statements about OSB's, its
directors' and/or management's beliefs and expectations, are
forward-looking statements. By their nature, forward-looking
statements involve risk and uncertainty because they relate to
events and depend upon circumstances that may or may not occur in
the future that could cause actual results or events to differ
materially from those expressed or implied by the forward-looking
statements. Factors that could cause actual business, strategy,
plans and/or results (including but not limited to the payment of
dividends) to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such
forward-looking statements made by OSB or on its behalf include,
but are not limited to: general economic and business conditions in
the UK and internationally; market related trends and developments;
fluctuations in exchange rates, stock markets, inflation,
deflation, interest rates, energy prices and currencies; policies
of the Bank of England, the European Central Bank and other G7
central banks; the ability to access sufficient sources of capital,
liquidity and funding when required; changes to OSB's credit
ratings; the ability to derive cost savings; changing demographic
developments, and changing customer behaviour, including consumer
spending, saving and borrowing habits; changes in customer
preferences; changes to borrower or counterparty credit quality;
instability in the global financial markets, including Eurozone
instability, the potential for countries to exit the European Union
(the EU) or the Eurozone, and the impact of any sovereign credit
rating downgrade or other sovereign financial issues; technological
changes and risks to cyber security; natural and other disasters,
adverse weather and similar contingencies outside OSB's control;
inadequate or failed internal or external processes, people and
systems; terrorist acts and other acts of war (including, without
limitation, the Russia-Ukraine war and any continuation and
escalation thereof) or hostility and responses to those acts;
geopolitical events and diplomatic tensions; the impact of
outbreaks, epidemics and pandemics or other such events; changes in
laws, regulations, taxation, ESG reporting standards, accounting
standards or practices, including as a result of the UK's exit from
the EU; regulatory capital or liquidity requirements and similar
contingencies outside OSB's control; the policies and actions of
governmental or regulatory authorities in the UK, the EU or
elsewhere including the implementation and interpretation of key
legislation and regulation; the ability to attract and retain
senior management and other employees; the extent of any future
impairment charges or write-downs caused by, but not limited to,
depressed asset valuations, market disruptions and illiquid
markets; market relating trends and developments; exposure to
regulatory scrutiny, legal proceedings, regulatory investigations
or complaints; changes in competition and pricing environments; the
inability to hedge certain risks economically; the adequacy of loss
reserves; the actions of competitors, including non-bank financial
services and lending companies; the success of OSB in managing the
risks of the foregoing; and other risks inherent to the industries
and markets in which OSB operates.
Accordingly, no reliance may be placed on any forward-looking
statement. Neither OSB, nor any of its directors, officers or
employees provides any representation, warranty or assurance that
any of these statements or forecasts will come to pass or that any
forecast results will be achieved. Any forward-looking statements
made in this document speak only as of the date they are made and
it should not be assumed that they have been revised or updated in
the light of new information of future events. Except as required
by the Prudential Regulation Authority, the Financial Conduct
Authority, the London Stock Exchange PLC or applicable law, OSB
expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements
contained in this document to reflect any change in OSB's
expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
For additional information on possible risks to OSB's business,
please see the Risk review section in the 2022 Annual Report and
Financial Statements. Copies of this are available at www.osb.co.uk
and on request from OSB.
Nothing in this document or any subsequent discussion of this
document constitutes or forms part of a public offer under any
applicable law or an offer or the solicitation of an offer to
purchase or sell any securities or financial instruments. Nor does
it constitute advice or a recommendation with respect to such
securities or financial instruments, or any invitation or
inducement to engage in investment activity under section 21 of the
Financial Services and Markets Act 2000. Past performance cannot be
relied on as a guide to future performance. Statements about
historical performance must not be construed to indicate that
future performance, share price or results in any future period
will necessarily match or exceed those of any prior period. Nothing
in this document is intended to be, or should be construed as, a
profit forecast or estimate for any period.
In regard to any information provided by third parties, neither
OSB nor any of its directors, officers or employees explicitly or
implicitly guarantees that such information is exact, up to date,
accurate, comprehensive or complete. In no event shall OSB be
liable for any use by any party of, for any decision made or action
taken by any party in reliance upon, or for inaccuracies or errors
in, or omission from, any third-party information contained herein.
Moreover, in reproducing such information by any means, OSB may
introduce any changes it deems suitable, may omit partially or
completely any aspect of the information from this document, and
accepts no liability whatsoever for any resulting discrepancy.
Liability arising from anything in this document shall be
governed by English law, and neither OSB nor any of its affiliates,
advisors or representatives shall have any liability whatsoever (in
negligence or otherwise) for any loss howsoever arising from any
use of this document or its contents or otherwise arising in
connection with this document. Nothing in this document shall
exclude any liability under applicable laws that cannot be excluded
in accordance with such laws.
Certain figures contained in this document, including financial
information, may have been subject to rounding adjustments and
foreign exchange conversions. Accordingly, in certain instances,
the sum or percentage change of the numbers contained in this
document may not conform exactly to the total figure given.
Non-IFRS performance measures
OSB believes that any non-IFRS performance measures included in
this document provide a more consistent basis for comparing the
business' performance between financial periods and provide more
detail concerning the elements of performance which OSB is most
directly able to influence or which are relevant for an assessment
of OSB. They also reflect an important aspect of the way in which
operating targets are defined and performance is monitored by the
Board. However, any non-IFRS performance measures in this document
are not a substitute for IFRS measures and readers should consider
the IFRS measures as well. For further details, refer to the
Alternative performance measures section in the 2022 Annual Report
and Financial Statements. Copies of this are available at
www.osb.co.uk and on request from OSB.
Key Performance Indicators - statutory
GBP2.3bn GBP24.6bn
Gross organic lending up 2% Net loan book up 4%
H1 2022: GBP2.3bn FY 2022: GBP23.6bn
---------------------------------- -----------------------------------
GBP76.7m 171bps
Profit before tax down 71% Net interest margin(1) down 109bps
H1 2022: GBP268.1m H1 2022: 280bps
---------------------------------- -----------------------------------
47% 37bps
Cost to income ratio(2) increased Loan loss ratio(3) up 36bps
22pps H1 2022: 1bp
H1 2022: 25%
---------------------------------- -----------------------------------
78bps 5%
Management expense ratio(4) up Return on equity(5) declined 16pps
5bps H1 2022: 21%
H1 2022: 73bps
---------------------------------- -----------------------------------
15.7% 3 months + in arrears(7) broadly
CET1(6) remained strong stable
FY 2022: 18.4% OSB 1.3%, CCFS 1.0%
FY 2022: OSB 1.2%, CCFS 0.9%
---------------------------------- -----------------------------------
Customer NPS(8) strong
OSB +71, CCFS +60
H1 2022: OSB +69, CCFS +70
----------------------------------
1. Net interest income as a percentage of a 7 point average of
interest earning assets, annualised on an actual days basis
2. Administrative expenses as a percentage of total income
3. Impairment losses as a percentage of a 7 point average of
gross loans and advances, annualised
4. Administrative expenses as a percentage of 7 point average of
total assets, annualised
5. Profit attributable to ordinary shareholders, which is profit
after tax and after deducting coupons on AT1 securities, gross of
tax, as a percentage of a 7 point average of shareholders' equity
(excluding GBP150m of AT1 securities), annualised
6. Capital metrics disclosed in this report are on an individual
consolidation basis (OSB solo) which includes the Company and
subsidiaries except for the offshore servicing entity OSBI, SPVs
relating to securitisations and the CCFS entities acquired in
October 2019.
7. Portfolio arrears rate of accounts for which there are
missing or overdue payments by more than three months as a
percentage of gross loans
8. OSB customer Net Promoter Score (NPS) relates to Kent
Reliance savings customers and CCFS customer NPS relates to Charter
Savings Bank customers. It is calculated based on customer
responses to the question of whether they would recommend the
Group's products to a friend. The responses provide a score between
-100 and +100
Key Performance Indicators - underlying
Underlying key performance indicators for the six months to 30
June 2023 and 30 June 2022 reflect results for the combined Group,
excluding integration costs and other acquisition-related items
(see Reconciliation of statutory to underlying results in the
Financial review).
GBP24.5bn GBP116.6m
Net loan book up 4% Profit before tax down 60%
FY 2022: GBP23.5bn H1 2022: GBP294.1m
---------------------------------- ----------------------------------
203bps 40%
Net interest margin(1) down 99bps Cost to income ratio(2) increased
H1 2022: 302bps 17pps
H1 2022: 23%
---------------------------------- ----------------------------------
37bps 78bps
Loan loss ratio(3) up 35bps Management expense ratio(4) up
H1 2022: 2bps 6bps
H1 2022: 72bps
---------------------------------- ----------------------------------
8%
Return on equity(5) down 16pps
H1 2022: 24%
----------------------------------
For definitions of key ratios please see footnotes in statutory
KPIs above.
CEO Report
The first half of 2023 saw strong operational performance,
however our financial results were significantly impacted by the
adverse effective interest rate (EIR) adjustment announced in July.
The fundamentals of our business remained strong; the Group
delivered underlying net loan book growth of 4% (5% excluding the
impact of the adverse EIR adjustment), our loan book demonstrated
strong credit performance with three months plus arrears remaining
broadly stable at 1.2% compared to 1.1% at the end of 2022, and the
Group's capital and liquidity positions remained robust.
The Group's proposition continues to benefit from doing the
right thing for our customers, as we offered a full range of
mortgages to our brokers and customers even when others struggled
to do so, demonstrated by growth in the mortgage book and our
increasing share in core market sub-segments. This strong demand
has also been seen from our savings customers, as we rewarded our
loyal savers with consistent, attractively priced products.
The Group has embedded the FCA's new Consumer Duty rules that
came into force at the end of July, as we strive to deliver the
best possible outcomes and experience for our customers, and we
demonstrated our commitment to borrowers by becoming signatories to
the Government's Mortgage Charter.
Financial performance
The Group's results for the first half of 2023 were
significantly impacted by the adverse underlying EIR adjustment of
GBP180.7m announced in the Trading update on 6 July 2023, however
the Group's performance excluding this adjustment remained
strong.
The Group delivered an underlying pre-tax profit of GBP116.6m
for the first six months of 2023, down 60% from GBP294.1m in the
first half of 2022, with the benefit of net loan book growth and
improved margins more than offset by the adverse EIR adjustment and
a higher impairment charge, reflecting the deterioration in house
prices and the macroeconomic outlook during the period. On a
statutory basis, profit before tax was GBP76.7m (H1 2022:
GBP268.1m).
The underlying and statutory net interest margins reduced to
203bps and 171bps, respectively (H1 2022: 302bps and 280bps) as the
benefit of base rate rises was more than offset by the adverse EIR
adjustment. Excluding this EIR adjustment, the underlying net
interest margin (NIM) for the first half of 2023 would have been
marginally ahead of market expectation.
The Group continued its focus on cost efficiency and discipline,
with the management expense ratio increasing to 78bps on both an
underlying and statutory basis (H1 2022: 72bps and 73bps,
respectively), due to the anticipated impact of inflation and
investment in people and operations, which also saw underlying
administrative expenses increase to GBP109.2m, up 23% compared to
the first half of 2022. The cost to income ratio was 40% and 47% on
an underlying and statutory basis respectively for the first six
months of 2023 (H1 2022: 23% and 25%, respectively), however this
was impacted by the reduction in income due to the adverse EIR
adjustment.
The Group delivered an underlying return on equity of 8% for the
first half (H1 2022: 24%) and statutory return on equity was 5% (H1
2022: 21%) reflecting the impact of the adverse EIR adjustment on
profit in the period.
Our lending franchise
Throughout the first half of 2023, the macroeconomic backdrop
was challenging for our owner occupier borrowers and Buy-to-Let
landlords, as they dealt with inflationary headwinds and rapidly
rising interest rates. However, we saw strong demand for the
Group's lending products, especially in the first quarter of the
year, as borrowers took advantage of more attractive mortgage rates
available at that time and our service capacity. Refinancing
activity was particularly strong in the period, as borrowers sought
to lock in lower monthly repayments in expectation of future base
rate rises and we continued to benefit from some purchase activity
in both the Buy-to-Let and Residential sub-segments, despite the
overall subdued market dynamic.
I am particularly pleased that our lending franchises continue
to grow and we are now ranked fourth largest Buy-to-Let lender in
the UK in terms of gross new lending in 2022, according to recently
released data from UK Finance.(1) This strong demand continued into
the first half, supporting underlying and statutory net loan book
growth of 4% to GBP24.5bn and GBP24.6bn respectively (31 December
2022: GBP23.5bn and GBP23.6bn). Excluding the adverse EIR
adjustment, the underlying and statutory net loan book would have
increased by 5% in the first six months of 2023. Organic
originations of GBP2.3bn were up 2% from the prior period.
In addition to the performance of our Buy-to-Let and Residential
sub-segments, I am pleased that our InterBay brand, which offers
bespoke commercial and semi-commercial products, had a very
successful first half of 2023. The new product set introduced
earlier in the year led to a more than two-fold increase in organic
originations.
Our well-established Kent Reliance retention programme, Choices,
saw 75% of borrowers refinance with the Group within three months
of their fixed rate product ending during the first half. We
established a proactive retention programme for Precise Mortgages
borrowers towards the end of 2022 and we are already seeing a
steady improvement in levels of retention, with 59% of borrowers
refinancing with the Group within three months of their fixed rate
product ending in the first half. Our customer focus was further
demonstrated as our brands and mortgage products continued to win
industry awards, including Best Specialist Lender from L&G
Mortgage Club for Kent Reliance and Best Short-Term Lender from
Mortgage Strategy Awards for Precise Mortgages. Our strong
relationships with brokers were reflected in improved NPS of +56
for OSB and +61 for CCFS.
Credit and risk management
Our loan book continued to demonstrate consistently strong
credit performance with balances over three months in arrears
remaining broadly stable at 1.2% of the loan book at the end of
June (31 December 2022: 1.1%). The Group's loan to value (LTV)
position remained strong with the weighted average LTV of the loan
book at 63% as at 30 June 2023 (31 December 2022: 60%), reflecting
a moderation in house prices in the period. The weighted average
LTV of new business written by the Group improved marginally to 68%
from 71% in the prior period.
The Group recorded an impairment charge of GBP44.5m on an
underlying basis, which represented an underlying loan loss ratio
of 37bps for the first six months of 2023 (H1 2022: GBP2.0m and
2bps, respectively). The impairment charge was primarily due to
moderation in house prices and the worsening macroeconomic outlook
as well as modelled IFRS 9 stage migration. The statutory
impairment charge was GBP44.6m, equivalent to a loan loss ratio of
37bps (H1 2022: GBP1.6m and 1bp).
We continue to actively engage with the PRA on the timing of our
IRB application, relating to rating systems covering our core
Buy-to-Let and residential first charge mortgages. The Group is
ready to submit module 1 when regulatory consent is provided.
Multi-channel funding model
Under our two savings brands, Kent Reliance and Charter Savings
Bank, our focus is on combining excellent customer service with
good value. I am pleased that our fair and competitively priced
offering was popular during the first six months of 2023, which
helped us grow our retail deposit book to GBP20.7bn from GBP19.8bn
at the end of 2022, as we opened nearly 86,000 new savings
accounts. Our actions were also reflected in the strong NPS for the
first half of the year of +71 for Kent Reliance and +60 for Charter
Savings Bank, as well as high retention rates; 90% for maturing
fixed rate bonds and ISAs at Kent Reliance and 87% for Charter
Savings Bank.
We complement retail deposits funding with our expertise in the
wholesale markets, and in June we completed a GBP330m
securitisation of owner-occupied prime mortgages, originated by
Precise Mortgages under the CMF programme, demonstrating investors'
demand for Group issuance. The Group's drawings under the Term
Funding Scheme for SMEs remained at GBP4.2bn (31 December 2022:
GBP4.2bn).
Capital management
The OSB solo capital position, which reflects the post-tax
impact of the adverse EIR adjustment, remained strong with a CET1
ratio of 15.7% as at 30 June 2023 (31 December 2022: 18.4%).
The Board is confident that the Group's strategy and proven
capital generation capability can support both strong net loan book
growth and further capital returns to shareholders.
Looking forward
We are making good progress on the next phase of technology
investment which focuses on improving efficiency in our business
operations, an enhanced user experience for our customers and
further streamlining the interaction with our broker community. In
2024, we expect to launch a new deposit platform that will enhance
the journey for our savers, whilst driving further operational
efficiency.
The Group remains well capitalised, with strong liquidity and a
high-quality loan book and customer franchises. We have supported
our customers and colleagues who are facing the realities of the
increasing cost of living and rising interest rates, and we will
continue to focus on those who require most assistance.
We remain cognisant of the uncertain macroeconomic outlook and
the potential impact of the higher cost of living and borrowing on
the mortgage market and customer affordability, however we are
building a healthy pipeline of new business and have a proven track
record of retaining customers, attracting new business and working
with high quality borrowers. Based on our current pipeline and
application volumes, we reiterate our target underlying net loan
book growth of c. 7% for 2023. The underlying NIM for the second
half of 2023 is expected to be broadly flat to 2022, resulting in a
full year underlying NIM of c. 2.6% subject to market conditions.
We expect the underlying cost to income ratio to be c.29% for the
second half and c.33% for the full year.
The Group has a proven track record of delivering strong
results, with a clear strategy and risk management framework. We
have consistently demonstrated our resilience, which allows us to
look to the future with cautious optimism.
Andy Golding
Chief Executive Officer
11 August 2023
1. UK Finance, Annual ranking of mortgage lenders, MM11G, July
2023
Mortgage market
UK gross mortgage lending in the first five months of 2023
reduced by 28% to GBP89.5bn from GBP124.8bn in the same period of
2022.(1) Similarly, property transactions reduced by 20% during the
first five months to 388,000(2) and new mortgage approvals reduced
by 36% to GBP84.1bn from GBP132.1bn in the same period of 2022.(3)
This decline in activity was widely attributed to rapidly rising
interest rates, with the Bank of England's base rate increasing by
1.50% from 3.50% at the start of January to 5.00% by the end of
June, and related increases in mortgage pricing that led to
affordability challenges for some borrowers with maturing mortgages
and particularly for first time buyers.
Pricing of fixed rate mortgages in the first half reflected
volatile interest rate swap prices that were in turn reacting to
significant changes in the outlook for inflation. The Bank of
England's reported average quoted interest rates on two-year fixed
rate residential mortgages at 75% LTV illustrate this dynamic. At
the end of 2022 the average rate was 5.43%, gradually falling to
4.63% in April before rising to 5.50% at the end of June.(4) This
effect was mirrored by the availability of mortgage products in the
market, with data from the mortgage sourcing provider Twenty7Tec
indicating that c.14,000 products were available in January
increasing to c.17,000 in May and falling back to c.13,500 by the
end of June(5) .
The rapidly rising interest rates and higher cost of living led
to a greater emphasis on refinancing activity as borrowers sought
to lock in fixed repayments to protect against further interest
rate rises. According to UK Finance, total refinancing increased by
1.5% in the first four months of the year, compared to the same
period in 2022.(6)
Within this total, product transfers, where borrowers take a new
product from their existing lender, increased in popularity with
volumes increasing by 12.5% to GBP70.5bn from GBP62.7bn in 2022,
representing 74% of all refinancing activity (2022: 67%).(7)
Notably, these transactions are not reflected in new mortgage
lending and provide context for the reductions in gross lending
volumes across the market during the period.
High inflation and the impact of rising interest rates have
impacted prospective borrowers' confidence and affordability.
Figures from the HM Land Registry demonstrate that house prices
reduced by 1.4% in the five months to May 2023, in contrast to the
4.6% growth reported at the same point last year.(8)
In the Private Rented Sector, the first half of 2023 saw
continued high tenant demand and tight supply, as landlords
considered their options amid rising costs and potential future
requirements contained in the Renter's Reform Bill introduced to
Parliament in May. Respondents to the RICS Residential Market
Survey have reported consistently high levels of demand for over
two years, while landlord instructions have continued to decline(9)
. This mismatch exerted upward pressure on rents, with private
rental prices in the UK rising by 5.0% in the 12 months to May
2023, according to data from the ONS.(10)
Buy-to-Let gross advances reached GBP12.5bn in the five months
to May 2023, a decrease of 46% compared with GBP23.3bn in the same
period in 2022, with new purchases at c. 28% of total lending,
broadly stable to the prior period.(11)
1. UK Finance, New mortgage lending, UK (BOE) purpose of loan, June 2023
2. HMRC, Monthly property transactions, June 2023
3. UK Finance, Approvals for new mortgages by purpose of loan, UK (BOE),
June 2023
4. BoE, 2 year (75% LTV) fixed rate mortgage to households (IUMBV34), June
2023
5. Twenty7Tec, Mortgage Market Report, May 2023
6. UK Finance, RF14 new refinancing and releveraging mortgages, June 2023
7. UK Finance, RF14 new refinancing and releveraging mortgages, June 2023
8. ONS, UK House Price Index, May 2023
9. RICS, Residential Market Survey, May 2023
10. ONS, Index of Private Housing Rental Prices, May 2023
11. UK Finance, BTL mortgages outstanding and new lending, June 2023
Segment review
The Group reports its lending business under two segments:
OneSavings Bank and Charter Court Financial Services.
OneSavings Bank (OSB) segment
The following tables present OSB's contribution to profit and
loans and advances to customers on a statutory basis:
Contribution to profit for the period
BTL/SME Residential Total
For the six months ended 30
June 2023 GBPm GBPm GBPm
Net interest income 196.3 44.8 241.1
Other expense (7.6) (2.3) (9.9)
Total income 188.7 42.5 231.2
Impairment of financial assets (34.4) (4.8) (39.2)
Contribution to profit 154.3 37.7 192.0
For the six months ended 30
June 2022
Net interest income 175.7 42.9 218.6
Other income 3.4 0.7 4.1
Total income 179.1 43.6 222.7
Impairment of financial assets (2.6) 0.7 (1.9)
Contribution to profit 176.5 44.3 220.8
Loans and advances to customers
BTL/SME Residential Total
As at 30 June 2023 GBPm GBPm GBPm
Gross loans and advances to
customers 11,606.7 2,342.1 13,948.8
Expected credit losses (129.9) (9.7) (139.6)
Net loans and advances to
customers 11,476.8 2,332.4 13,809.2
Risk-weighted assets 5,819.8 1,066.3 6,886.1
As at 31 December 2022
Gross loans and advances to
customers 10,920.0 2,324.7 13,244.7
Expected credit losses (95.2) (8.0) (103.2)
Net loans and advances to
customers 10,824.8 2,316.7 13,141.5
Risk-weighted assets 5,258.8 1,033.7 6,292.5
OSB Buy-to-Let/SME sub-segment
Loans and advances to customers
30-Jun-2023 31-Dec-2022
GBPm GBPm
-------------------------------------- ----------- -----------
Buy-to-Let 10,287.7 9,755.0
Commercial 996.4 881.3
Residential development 237.5 184.5
Funding lines 85.1 99.2
Gross loans and advances to customers 11,606.7 10,920.0
Expected credit losses (129.9) (95.2)
Net loans and advances to customers 11,476.8 10,824.8
This sub-segment comprises Buy-to-Let mortgages secured on
residential property held for investment purposes by experienced
and professional landlords, commercial mortgages secured on
commercial and semi-commercial properties held for investment
purposes or for owner-occupation, residential development finance
to small and medium-sized developers, secured funding lines to
other lenders and asset finance.
The Buy-to-Let/SME net loan book increased by 6% to GBP11,476.8m
in the first six months of 2023 supported by organic originations
of GBP1,080.5m, which were up by 30% from GBP832.3m in the prior
period.
Buy-to-Let/SME net interest income increased by 12% to GBP196.3m
from GBP175.7m in the prior period, primarily due to growth in the
loan book and the beneficial impact of base rate rises. The Group
also recognised an adverse EIR adjustment of GBP2.6m in the period
(H1 2022: GBP3.9m gain) based on updated customer behavioural
trends.
This segment recognised GBP7.6m of other expenses relating to
losses from the Group's hedging activities (H1 2022: GBP3.4m gain)
and an impairment charge of GBP34.4m (H1 2022: GBP2.6m). The
impairment charge was largely due to house price moderation,
changes in the macroeconomic outlook and modelled IFRS 9 stage
migration. Overall, the Buy-to-Let/SME segment made a contribution
to profit of GBP154.3m, down 13% compared with GBP176.5m in the
first six months of 2022, largely due to the higher impairment
charge in the period.
The Group remained highly focused on the risk assessment of new
lending, as demonstrated by the reduction in the average LTV for
Buy-to-Let/SME originations to 70% (H1 2022: 74%). The average book
LTV in the Buy-to-Let/SME segment increased to 66% (31 December
2022: 63%) as a result of house price depreciation in the period,
with 4.3% of loans exceeding 90% LTV (31 December 2022: 3.2%).
Buy-to-Let
The Buy-to-Let gross loan book increased by 5% to GBP10,287.7m
at the end of June 2023 (31 December 2022: GBP9,755.0m) supported
by originations of GBP786.9m, which increased by 17% from GBP673.2m
in the prior period.
Rapidly rising mortgage interest rates led to a continued focus
on refinancing in the first half as landlords sought to lock in
lower monthly repayments in expectation of further base rate rises,
and the proportion of Kent Reliance Buy-to-Let completions
represented by remortgages remained broadly stable at 59% (H1 2022:
60%). In addition, there was also an increasing trend in product
transfers, with 75% of existing borrowers choosing a new product,
under the Choices retention programme, within three months of their
initial rate ending (H1 2022: 62%).
Five-year fixed rate mortgages remained popular and represented
70% of Kent Reliance completions (H1 2022: 67%). Professional,
multi-property landlords continued to add to their portfolios and
optimise their businesses from a tax perspective and represented
91% of completions by value for the Kent Reliance
brand (H1 2022: 83%) and 86% of mortgage purchase applications
in Kent Reliance came from landlords borrowing via a limited
company (H1 2022: 76%).
Research conducted by BVA BDRC, on behalf of the Group, showed
that the overall proportion of landlords planning to purchase new
properties had fallen to 10% from 18% in the first quarter of 2022.
However, of those planning to acquire more properties, the
proportion planning to do so within a limited company ownership
structure, preferred by professional landlords, has continued to
increase, reaching 62% in the first quarter of 2023 (Q1 2022: 50%).
This was especially true for landlords with portfolios of six or
more properties, who represented just under two-thirds (64%) of all
landlords that intended to purchase within a limited company
structure.
The weighted average LTV of the Buy-to-Let book as at 30 June
2023 increased to 65% from 62% at the end of 2022, as a result of
house price depreciation in the period and the average loan size
remained unchanged from the end of 2022 at GBP255k. The weighted
average interest coverage ratio for Buy-to-Let originations during
the first six months of 2023 remained high at 178% (H1 2022: 211%)
despite significantly higher mortgage interest rates.
Commercial
Through its InterBay brand, the Group lends to borrowers
investing in commercial and semi-commercial property, reported in
the Commercial total, and more complex Buy-to-Let properties and
portfolios, reported in the Buy-to-Let total.
The Group experienced an increased level of applications
following the launch of new products in February and March under
the InterBay brand. Organic originations more than doubled to
GBP193.7m in the period (H1 2022: GBP72.0m) supporting a 13% growth
in the gross loan book to GBP996.4m as at 30 June 2023 (31 December
2022: GBP881.3m).
The weighted average LTV of the commercial book increased to 73%
and the average loan size increased to GBP390k for the first six
months of 2023 (31 December 2022: 69% and GBP375k).
InterBay Asset Finance, which predominantly targets UK SMEs and
small corporates financing business-critical assets, continued to
grow in the first half of 2023, adding to the high quality
portfolio. The gross carrying amount under finance leases was
GBP202.6m as at 30 June 2023 (31 December 2022: GBP163.2m).
Residential development
Our Heritable residential development business provides
development finance to small and medium-sized residential property
developers. The preference is to fund house builders which operate
outside of central London and provide relatively affordable family
housing, as opposed to complex city centre schemes where
affordability and construction cost control can be more
challenging. New applications represent repeat business from the
team's extensive existing relationships.
The residential development finance gross loan book at the end
of June 2023 was GBP237.5m, with a further GBP137.5m committed (31
December 2022: GBP184.5m and GBP162.2m, respectively). Total
approved limits were GBP518.7m (31 December 2022: GBP502.6m),
exceeding drawn and committed funds due to the revolving nature of
the facility where construction is phased and facilities are
redrawn as sales on the initially developed properties occur. The
increased rates of sale experienced by Heritable's developer
customers in 2022 decreased at the end of that year and loan
repayments have been at a lower level during the first half of
2023.
At the end of June 2023, Heritable had commitments to finance
the development of 1,971 residential units, the majority of which
are houses located outside of central London. Heritable continues
to take an exacting approach to approving funding for new
customers, given the headwinds in the economy.
Funding lines
OSB continued to provide secured funding lines to non-bank
lenders which operate in certain high-yielding, specialist
sub-segments, primarily secured against property-related mortgages.
Total credit approved limits as at 30 June 2023 were GBP202.5m,
with total loans outstanding of GBP85.1m (31 December 2022:
GBP274.0m and GBP99.2m, respectively). During the period, the Group
maintained a cautious risk approach focusing on servicing existing
customers.
OSB Residential sub-segment
Loans and advances to customers
30-Jun-2023 31-Dec-2022
GBPm GBPm
-------------------------------------- ----------- -----------
First charge 2,189.7 2,152.9
Second charge 152.4 171.8
Gross loans and advances to customers 2,342.1 2,324.7
Expected credit losses (9.7) (8.0)
Net loans and advances to customers 2,332.4 2,316.7
This sub-segment comprises lending to owner-occupiers, secured
via first charge against a residential home and under the shared
ownership scheme.
The Residential sub-segment net loan book grew by 1% to
GBP2,332.4m as at 30 June 2023 (31 December 2022: GBP2,316.7m) and
organic originations reduced 27% to GBP179.7m during the period (H1
2022: GBP244.9m).
Net interest income in the Residential sub-segment increased by
4% to GBP44.8m (H1 2022: GBP42.9m) due to growth in the loan book
and the beneficial impact of base rate rises. The Group recognised
an adverse EIR adjustment of GBP0.2m (H1 2022: GBP2.5m gain). This
segment also recognised GBP2.3m of other expenses (H1 2022:
GBP0.7m) relating to losses from hedging activities and an
impairment charge of GBP4.8m (H1 2022: GBP0.7m credit) largely due
to house price moderation, changes in the macroeconomic outlook and
modelled IFRS 9 stage migration. The contribution to profit from
this segment was GBP37.7m, down 15% from GBP44.3m in the same
period of 2022.
The average book LTV increased to 47% (31 December 2022: 45%) as
a result of house price depreciation in the period, with only 2.1%
of loans with LTVs exceeding 90% (31 December 2022: 0.8%). The
average LTV of new residential origination in the first six months
of 2023 remained broadly flat at 62% (H1 2022: 61%).
First charge
First charge mortgages are provided under the Kent Reliance
brand, which largely serves prime credit quality borrowers with
more complex circumstances. This includes high net worth
individuals with multiple income sources and self-employed
borrowers, as well as those buying a property in conjunction with a
housing association under shared ownership schemes.
The first charge originations under Kent Reliance brand reduced
by 27% to GBP179.7m in the first six months of 2023 (H1 2022:
GBP244.9m) due to volatility in market pricing reducing the overall
activity in this segment. The gross loan book increased by 2% to
GBP2,189.7m from GBP2,152.9m at the end of 2022.
Second charge
The OSB second charge mortgage book is in run-off and managed by
Precise Mortgages. Total gross loans were GBP152.4m as at 30 June
2023 (31 December 2022: GBP171.8m).
Charter Court Financial Services (CCFS) segment
The following tables present the segment's contribution to
profit and loans and advances to customers on an underlying basis,
excluding acquisition-related items and the reconciliation to the
statutory results.
Contribution to profit for the period
For the six Total Total
months to 30 June Buy-to-Let Residential Bridging Second charge Other(1) underlying Acquisition- related items(2) statutory
2023 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest
income/(expense) 3.1 20.3 3.8 2.7 9.3 39.2 (42.8) (3.6)
Other income - - - - 0.5 0.5 4.0 4.5
Total income 3.1 20.3 3.8 2.7 9.8 39.7 (38.8) 0.9
Impairment of
financial assets (3.2) (1.8) (0.4) 0.1 - (5.3) (0.1) (5.4)
Contribution to
profit (0.1) 18.5 3.4 2.8 9.8 34.4 (38.9) (4.5)
For the six Total Total
months to 30 June Buy-to-Let Residential Bridging Second charge Other(1) underlying Acquisition- related statutory
2022 GBPm GBPm GBPm GBPm GBPm GBPm items(2) GBPm GBPm
Net interest
income/(expense) 102.4 45.6 2.1 3.0 (2.5) 150.6 (25.8) 124.8
Other income - - - - 10.7 10.7 5.3 16.0
Total income 102.4 45.6 2.1 3.0 8.2 161.3 (20.5) 140.8
Impairment of
financial assets (2.6) 2.5 (0.1) 0.1 - (0.1) 0.4 0.3
Contribution to
profit 99.8 48.1 2.0 3.1 8.2 161.2 (20.1) 141.1
1. Other relates to net interest income from acquired loan
portfolios as well as gains on structured asset sales, fee income
from third party mortgage servicing and gains or losses on the
Group's hedging activities.
2. For more details on acquisition-related adjustments, see
Reconciliation of statutory to underlying results in the Financial
review.
Loans and advances to customers
Total
As at 30 June Buy-to-Let Residential Bridging Second charge Other(1) underlying Acquisition-related items(2) Total statutory
2023 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross loans
and advances
to customers 7,634.9 2,757.9 266.8 97.3 15.1 10,772.0 38.1 10,810.1
Expected
credit
losses (27.0) (5.7) (0.9) (0.1) - (33.7) 1.2 (32.5)
Net loans and
advances to
customers 7,607.9 2,752.2 265.9 97.2 15.1 10,738.3 39.3 10,777.6
Risk-weighted
assets 3,076.6 1,178.9 139.1 40.7 5.6 4,440.9 26.9 4,467.8
Total
As at 31 Buy-to-Let Residential Bridging Second charge Other(1) underlying Acquisition-related items(2) Total statutory
December 2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross loans
and advances
to customers 7,468.8 2,671.3 149.7 111.9 14.6 10,416.3 81.7 10,498.0
Expected
credit
losses (23.5) (3.8) (0.5) (0.2) - (28.0) 1.2 (26.8)
Net loans and
advances to
customers 7,445.3 2,667.5 149.2 111.7 14.6 10,388.3 82.9 10,471.2
Risk-weighted
assets 2,927.1 1,107.3 70.9 45.4 5.5 4,156.2 46.0 4,202.2
1. Other relates to acquired loan portfolios.
2. For more details on acquisition-related adjustments, see
Reconciliation of statutory to underlying results in the Financial
review.
CCFS segment
Underlying loans and advances to customers
30-Jun-2023 31-Dec-2022
GBPm GBPm
-------------------------------------- ----------- -----------
Buy-to-Let 7,634.9 7,468.8
Residential 2,757.9 2,671.3
Bridging 266.8 149.7
Second charge 97.3 111.9
Other(1) 15.1 14.6
Gross loans and advances to customers 10,772.0 10,416.3
Expected credit losses (33.7) (28.0)
Net loans and advances to customers 10,738.3 10,388.3
1. Other relates to acquired loan portfolios
CCFS targets specialist mortgage market sub-segments with a
focus on specialist Buy-to-Let mortgages secured on residential
property held for investment purposes by both non-professional and
professional landlords. It also provides specialist residential
mortgages to owner-occupiers, secured against residential
properties, including those unsupported by the high street banks.
In addition, it provides short-term bridging loans, secured against
residential property in both the regulated and unregulated
sectors.
The CCFS underlying net loan book grew by 3% to GBP10,738.3m at
the end of June 2023 (31 December 2022: GBP10,388.3m) supported by
organic originations of GBP1,060.3m, which decreased by 12% from
GBP1,204.8m of new business written in the same period last
year.
Buy-to-Let sub-segment
In the first half of 2023, CCFS' organic originations in the
Buy-to-Let sub-segment through the Precise Mortgages brand
decreased by 40% to GBP516.4m (H1 2022: GBP867.5m) however the
underlying gross Buy-to-Let loan book grew by 2% in the period to
GBP7,634.9m from GBP7,468.8m at the end of 2022.
Rapidly rising mortgage interest rates led to an increase in
refinancing activity in the first half of the year as landlords
sought to lock in lower monthly repayments in expectation of
further base rate rises, consequently the proportion of remortgages
increased to 53% of completions under the Precise Mortgages brand
as at 30 June 2023 (H1 2022: 50%). In October 2022, the Group
established a proactive retention programme for Precise Mortgages
borrowers that contributed to 59% of customers choosing a new
product with the Group within three months of their initial rate
coming to an end.
Five-year fixed rate mortgages continued to be popular and
accounted for 66% of Precise Mortgages completions in the period
(H1 2022: 69%). Borrowing via a limited company made up 65% of
Buy-to-Let completions (H1 2022: 66%) and loans for specialist
property types, including houses of multiple occupation and
multi-unit properties, represented 18% of completions in this
sub-segment (H1 2022: 21%).
Research conducted by BVA BDRC on behalf of the Group for the
first quarter of 2023, found that 67% of landlords reported an
increase in rental demand.
The weighted average LTV of the loan book and the average loan
size in this segment remained broadly stable at 67% and GBP190k,
respectively (31 December 2022: 66% and GBP191k). The new lending
average LTV reduced to 71% (H1 2022: 74%) and the weighted average
interest coverage ratio for Buy-to-Let origination remained high at
154% (H1 2022: 197%) despite significantly higher mortgage interest
rates.
Underlying net interest income in this sub-segment reduced to
GBP3.1m compared with GBP102.4m in the prior period, as the benefit
of loan book growth and base rate rises were more than offset by
the underlying adverse EIR adjustment of GBP137.7m (H1 2022:
GBP6.2m) due to the expectation that Precise Mortgages borrowers
would spend less time on the higher reversionary rate before
refinancing, based on recently observed customer behavioural
trends. This segment recognised an impairment charge of GBP3.2m (H1
2022: GBP2.6m) largely due to house price moderation, changes in
the macroeconomic outlook and modelled IFRS 9 stage migration. On
an underlying basis, the Buy-to-Let sub-segment made a negative
contribution to profit of GBP0.1m in the first half of 2023 (H1
2022: GBP99.8m).
On a statutory basis, the Buy-to-Let sub-segment made a negative
contribution to profit of GBP30.8m (H1 2022: GBP81.8m).
Residential sub-segment
The underlying gross loan book in CCFS' Residential sub-segment
increased by 3% to GBP2,757.9m at the end of June 2023 (31 December
2022: GBP2,671.3m) supported by a 23% increase in organic
originations to GBP317.2m in the first half of 2023 (H1 2022:
GBP257.1m).
The Group continued to benefit from CCFS' expertise, with a
strong focus on first time buyers, including self-employed
individuals and those with minor adverse credit records. Strong
application levels were observed throughout the period following
the relaunch of several products in January, including products
supporting the Right to Buy scheme.
The average loan size in this sub-segment increased to GBP152k
with the average book LTV remaining broadly stable at 58% as at 30
June 2023 (31 December 2022: GBP147k and 57%, respectively). The
average LTV for new lending reduced to 62% in the period (H1 2022:
66%) as the Group continued to focus on the risk assessment of new
lending.
Underlying net interest income reduced to GBP20.3m (H1 2022:
GBP45.6m) as the benefits of loan book growth and base rate rises
were more than offset by the underlying adverse EIR adjustment of
GBP40.3m (H1 2022: GBP0.5m) due to the expectation that Precise
Mortgages borrowers would spend less time on the higher
reversionary rate before refinancing, based on observed customer
behavioural trends. The Residential sub-segment recorded an
impairment charge of GBP1.8m versus a GBP2.5m credit in the first
half of 2022 largely due to house price moderation, changes in the
macroeconomic outlook and modelled IFRS 9 stage migration. On an
underlying basis, the Residential sub-segment made a contribution
to profit of GBP18.5m, compared with GBP48.1m in the same period in
2022.
On a statutory basis, the Residential sub-segment made a
contribution to profit of GBP7.5m (H1 2022: GBP41.3m).
Bridging sub-segment
Short-term bridging originations increased to GBP226.7m compared
with GBP77.0m in the first half of 2022 as the Group continued to
enhance and promote its bridging product offering throughout the
period. The gross loan book in this sub-segment increased by 78% to
GBP266.8m as at 30 June 2023 (31 December 2022: GBP149.7m).
Underlying net interest income increased to GBP3.8m from GBP2.1m
in the first half of 2022, primarily due to strong new business
volumes in the period. The bridging sub-segment recorded an
impairment charge of GBP0.4m (H1 2022: GBP0.1m) largely due to
portfolio growth as the Group became more active in this sector and
overall made a contribution to profit of GBP3.4m in the first half
of 2023 (H1 2022: GBP2.0m).
On a statutory basis, the bridging sub-segment made a
contribution to profit of GBP2.6m (H1 2022: GBP1.8m).
Second charge sub-segment
The second charge gross loan book reduced to GBP97.3m compared
with GBP111.9m as at 31 December 2022, as the Group no longer
offers second charge products and the book is in run-off.
Underlying net interest income in the second charge sub-segment
was GBP2.7m (H1 2022: GBP3.0m) and the contribution to profit was
GBP2.8m (H1 2022: GBP3.1m) after an impairment credit of GBP0.1m,
unchanged from the first half of 2022.
On a statutory basis, the contribution to profit from the second
charge sub-segment was GBP2.4m (H1 2022: GBP2.7m).
Impact of the rapidly changing interest rate environment on
customer behaviour and EIR accounting
Rapidly rising rates and volatile outlook
The Bank of England raised the UK's base rate (BBR) 12 times
from the start of 2022 through to 30 June 2023, as summarised in
Table 1 below. The interest rate outlook was also volatile across
the same period and Table 2 below shows the futures implied BBR
peak since 30 June 2021 by quarter.
Table 1 Table 2
Date changed Base rate Date Implied BBR peak(1)
% %
December 2021 0.25 30 June 2021 0.70
30 September
February 2022 0.50 2021 0.99
March 2022 0.75 31 December 2021 1.37
May 2022 1.00 31 March 2022 2.52
June 2022 1.25 30 June 2022 3.09
30 September
August 2022 1.75 2022 5.88
September 2022 2.25 31 December 2022 4.74
November 2022 3.00 31 March 2023 4.65
December 2022 3.50 30 June 2023 6.29
February 2023 4.00
March 2023 4.25
May 2023 4.50
June 2023 5.00
1. Bloomberg, implied peak interest rate futures pricing at the
applicable
date
Impact on customer behaviour
These rapid BBR rises and fluctuating interest rate expectations
led to customer behavioural changes. Precise Mortgages (Precise)
fixed rate products were designed to revert to a rate which was
similar to the initial fixed rate and open market rates. This led
to borrowers spending significant time on the variable reversion
rate before choosing a new fixed rate product or refinancing.
Precise customers generally contractually revert to a margin over
BBR at the end of their fixed rate term. Over the course of the
first half of 2023, the Group observed a step change in how long
these customers were spending on the reversion rate in particular
the attrition rate of borrowers who stayed on the reversion rate
for several months. As BBR has continued to rise, customers have
seen steep increases in the BBR linked reversion rate, and as the
Group has continued to develop its Precise retention programme,
customers are choosing to refinance earlier and spend less time on
the higher reversion rate, compared to previously observed
behavioural trends.
In contrast, the Kent Reliance (KR) brand has historically had a
higher reversion rate, its managed standard variable rate (SVR),
resulting in a significant rate step-up in reversion versus both
the fixed rate and open market rates. Due to this step up, KR has a
long and well-established broker led retention programme, Choices,
to encourage borrowers to switch to a new product quickly. KR
customers have therefore spent less time on reversion historically
than Precise customers and their behaviour is therefore less
sensitive to increasing interest rates.
The following table illustrates the different way in which
Precise and KR mortgages have reverted since 2020, by showing the
difference between the average fixed and reversion rates for 5 year
fixed Buy-to-Let products when they reached the end of their
initial fixed rate term.
5 Year fixed Buy-to-Let
step up in reversion
Precise Kent Reliance
ppt ppt
2020 0.1 1.3
2021 (0.1) 1.7
2022 Q1 0.4 2.2
2022 Q2 1.1 3.0
2022 Q3 2.1 3.6
2022 Q4 3.7 4.5
2023 Q1 4.7 5.7
2023 Q2 5.6 6.4
The above table shows that the Precise Buy-to-Let 5 year fixed
rate products on average reverted to a variable rate broadly
consistent with the fixed rate prior to the recent rapid rise in
BBR. Conversely the KR 5 year fixed rate products have consistently
had a higher step-up in reversion providing an incentive to
refinance quickly.
The step-change in customer behavioural trends observed over the
course of the first half of 2023, led to a decrease of c.12 months
in the weighted average number of months Precise borrowers who
reach the end of their fixed term are expected to spend on the
reversion rate before refinancing to c.5 months as at 30 June
2023.
The Group has estimated that assuming 12 months less on
reversion for Precise borrowers and keeping all other assumptions
(including pricing, swap spreads, cost of funds and product mix)
unchanged leads to a reduction of 11bps in the Group's net interest
margin for new origination based on actual applications for Precise
Mortgages in the month of June 2023.
Kent Reliance borrowers, who reach the end of their fixed term
are expected on average to spend c.1 month on the reversion
rate.
Impact of the step-change in behaviour in reversion for Precise
customers
The reduction in the expected time spent on reversion by Precise
customers from c.17 to c.5 months, resulted in an adverse
underlying EIR adjustment to the carrying value of Loans and
Advances to Customers through Net Interest Income of GBP178.0m in
the first half of 2023. This moved the Precise EIR asset to an EIR
liability as explained in the EIR accounting overview below. Other
Group EIR adjustments totalled GBP2.7m in the first half.
The following table details Precise Mortgages' underlying EIR
assets and liabilities, with the movement in the balance sheet
recognised in Net Interest Income in each period.
Movement Underlying
recognised through EIR
Precise Mortgages EIR Net Interest Income Net asset/(liability)
GBPm GBPm GBPm
As at 31 December 2019 5.6
Recognition of interest
income 16.8
Behavioural adjustment (2.0)
As at 31 December 2020 14.8 20.4
Recognition of interest
income 12.6
Behavioural adjustment (14.7)
As at 31 December 2021 (2.1) 18.3
Recognition of interest
income 70.6
Behavioural adjustment (41.7)
As at 31 December 2022 28.9 47.3
Recognition of interest
income 58.9
Behavioural adjustment (178.0)
As at 30 June 2023 (119.1) (71.9)
Precise has historically had an EIR asset, primarily reflecting
the expected time spent on reversion and early repayment charges
(ERC) income which moved to a liability of GBP71.9m as at 30 June
2023 following the adverse EIR adjustment. This liability will
unwind over the remaining life of the mortgages (see EIR accounting
overview for more detail below).
Kent Reliance had a net EIR liability of GBP13.0m as at 30 June
2023 (31 December 2022: GBP17.2m) due to the deferral of net fee
income outweighing the impact of expected ERC income and time spent
in reversion.
The Group's commercial brand, InterBay, had an EIR asset of
GBP13.4m as at 30 June 2023 (31 December 2022: GBP8.8m) in relation
to expected ERC income and time spent in reversion. InterBay
products did not change in reversion versus the initial fixed rate
until 2022 when BBR and LIBOR replacement first exceeded interest
rate floors in the products.
Behavioural sensitivities
The sensitivity for Precise is +/- 3 months for those customers
expected to move onto the reversion rate. Applying a +/- 3 months
movement in the time spent on reversion would lead to a +/-
c.GBP70m impact on the underlying Net Interest Income and +/-
c.GBP80m impact on the statutory Net Interest Income.
This sensitivity will increase/decrease as BBR rises/falls.
EIR accounting overview
In accordance with IFRS 9, the Group recognises interest
income from mortgages using the EIR method, which
aims to recognise interest income at a consistent
EIR over the expected life of the mortgages.
The EIR method requires that an EIR is calculated
at origination that considers all contractual and
behavioural cash flows associated with the mortgage
including fees, early redemption charges (ERCs) and
the average time the customer spends on the reversion
rate after the initial fixed rate period. This has
the effect of bringing forward expected income from
the reversion period. An EIR asset is built up over
time from origination in respect of expected ERC income
and reversion income. An EIR liability is recognised
at origination in respect of deferred net fee income.
The Group uses the latest observable trends to predict
future behaviour in reversion and assumes current
interest rates for reversion cash flows when calculating
the EIR.
For Precise Mortgages products the reversion rate
is generally linked to BBR and if this remains static,
there is no change to the EIR% calculated at origination.
If BBR increases, the EIR methodology prescribes that
the EIR% is recalculated immediately to reflect the
higher anticipated income in the reversion period,
which leads to higher revenue recognition over the
expected remaining life of the mortgage.
A change in customer behaviour, which emerges over
time, for example customers spending less time on
the reversion rate before refinancing, can also lead
to a change in expected cash flows and the revenue
to be recognised. Generally, such a change would cause
a reduction in the anticipated total amount of interest
received from the customer over the revised expected
life of the mortgage. Similarly, an expectation of
a longer period spent on the reversion rate would
lead to an increase in the anticipated total amount
of interest received over the revised, longer life
of a mortgage.
The EIR% for a loan is not adjusted for behavioural
changes where a trend in customer behaviour is observed.
Instead IFRS 9 requires an immediate adjustment to
the carrying value of Loans and Advances to Customers,
with a corresponding gain or loss recognised in the
income statement. This maintains the EIR% for the
loan over its remaining behavioural life.
In the current rapidly rising rate environment, changes
in BBR are observable immediately and are reflected
in revisions to the EIR, applied prospectively, whereas
trends in customer behaviour take more time to emerge.
This leads to use of an EIR calculated based on cash
flows in reversion that are no longer expected, resulting
in a dynamic where a behavioural-driven adjustment,
due to customers spending less time on the reversion
rate, can create an EIR liability. This liability
unwinds over the remaining expected life of the mortgages
to adjust interest accruals to actual cash receipts.
----------------------------------------------------------
The Group's retention programmes
Kent Reliance has a long and well-established broker
led retention programme, Choices, to encourage borrowers
to switch to a new product quickly rather than refinance
away from the Group after a period on the higher reversion
rate. This programme has been successful in retaining
borrowers by engaging with them before the end of
their fixed rate term and offering preferential terms
compared to new customer offers to reflect the Group's
lower processing costs. In the first half of 2023,
75% (2022: 72%) of borrowers chose a new KR product
within 3 months of their initial product maturing.
The Group introduced a similar proactive retention
programme for Precise borrowers in October 2022 in
reaction to the BBR increases and the resulting step-up
in rates on reversion, and we are seeing a steady
improvement in levels of retention, with 59% of borrowers
refinancing with the brand within three months of
their fixed rate product ending during the first half.
-----------------------------------------------------------
Financial review
Summary statutory results
Review of the Group's performance on a statutory basis for the
six months to 30 June 2023 and 2022.
H1 2023 H1 2022
GBPm GBPm
Summary Profit or Loss
Net interest income 237.5 343.4
Net fair value (loss)/gain on financial instruments (8.1) 16.4
Other operating income 2.7 3.7
Administrative expenses (110.2) (91.3)
Provisions (0.6) 1.2
Impairment of financial assets (44.6) (1.6)
Integration costs - (3.7)
Profit before tax 76.7 268.1
--------- ---------
Profit after tax 59.3 208.9
H1 2023 H1 2022
Key ratios(1)
Net interest margin 171bps 280bps
Cost to income ratio 47% 25%
Management expense ratio 78bps 73bps
Loan loss ratio 37bps 1bp
Return on equity 5% 21%
30-Jun-23 31-Dec-22
GBPm GBPm
Extracts from the Statement of Financial Position
Loans and advances to customers 24,586.8 23,612.7
Retail deposits 20,713.7 19,755.8
Total assets 28,784.9 27,567.5
Key ratios
Common equity tier 1 ratio 15.7% 18.4%
Total capital ratio 19.3% 20.0%
1. For more detail on the calculation of key ratios, see the
Appendix.
Statutory profit
The Group's statutory profit before tax decreased by 71% to
GBP76.7m in the first half of 2023 (H1 2022: GBP268.1m), after
integration costs and other acquisition-related items of
GBP39.9m(1) (H1 2022: GBP26.0m), with the benefit of net loan book
growth and improved margins more than offset by the adverse
statutory EIR adjustment of GBP208.5m, as well as higher impairment
provisions and higher administrative expenses.
Statutory profit after tax was GBP59.3m for the first half of
2023, a decrease of 72% (H1 2022: GBP208.9m) and included after-tax
acquisition-related items of GBP28.6m(1) (H1 2022: GBP14.4m). The
Group's effective tax rate for the first six months of 2023 was
22.9%(2) , broadly stable compared to 22.2% in the prior
period.
Statutory return on equity for the first half of 2023 reduced to
5% (H1 2022: 21%) reflecting the reduction in profitability in the
period.
Net interest income
Statutory net interest income decreased by 31% in the period to
GBP237.5m (H1 2022: GBP343.4m), as the benefit of net loan book
growth and improved margins was more than offset by the adverse EIR
adjustment of GBP208.5m on a statutory basis (H1 2022: GBP2.6m).
The adverse EIR adjustment primarily related to the expectation
that Precise Mortgages borrowers would spend less time on the
higher reversionary rate before refinancing based on recently
observed customer behavioural trends.
Statutory net interest margin (NIM) decreased by 109bps to
171bps in the first half (H1 2022: 280bps), as the benefit of base
rate rises was more than offset by the adverse EIR adjustment which
accounted for 151bps of statutory NIM.
Net fair value (loss)/gain on financial instruments
Net fair value loss on financial instruments of GBP8.1m in the
first half of 2023 (H1 2022: GBP16.4m gain) included a net loss of
GBP29.0m (H1 2022: GBP4.3m) from hedge ineffectiveness, a gain on
unmatched swaps of GBP17.1m (H1 2022: GBP14.0m). The Group also
recorded a GBP5.1m gain (H1 2022: GBP5.3m) from the amortisation of
acquisition-related hedge accounting inception adjustments, a
GBP2.4m loss from the amortisation of hedge accounting inception
adjustments (H1 2022: GBP6.5m gain) and a GBP1.1m net gain from
other items (H1 2022: GBP5.1m loss).
The loss in respect of the ineffective portion of hedges arose
from recent swap volatility and will unwind over the remaining life
of the hedged fixed rate retail savings bonds and mortgages.
The net gain on unmatched swaps related primarily to fair value
movements on mortgage pipeline swaps, prior to them being matched
against completed mortgages, and was caused by an increase in
interest rate outlook on the SONIA yield curve. The Group
economically hedges its committed pipeline of mortgages and this
unrealised gain unwinds over the life of the swaps through hedge
accounting inception adjustments.
Other operating income
Statutory other operating income of GBP2.7m (H1 2022: GBP3.7m)
mainly comprised CCFS' commissions and servicing fees, including
those relating to securitised loans, which have been derecognised
from the Group's balance sheet.
Administrative expenses
Statutory administrative expenses increased by 21% to GBP110.2m
in the first half of 2023 (H1 2022: GBP91.3m) largely due to the
anticipated impact of inflation and planned investment in people
and operations.
The Group's statutory management expense ratio increased to
78bps in the first half of 2023 (H1 2022: 73bps) reflecting higher
administrative expenses and the statutory cost to income ratio
increased to 47% (H1 2022: 25%) primarily as a result of lower
income in the period, following the adverse EIR adjustment.
Impairment of financial assets
The Group recognised an impairment charge of GBP44.6m for the
first six months of 2023 (H1 2022: GBP1.6m) which represented a
statutory loan loss ratio of 37bps compared to 1bp in the first
half of 2022.
The Group adopted more adverse forward-looking macroeconomic
scenarios in its IFRS 9 models which together with house price
moderation in the period accounted for a GBP12.6m increase in
provisions. Enhancements to models and updates to post model
adjustments to reflect the deterioration in the outlook led to an
increase of GBP8.4m. In addition, a GBP4.5m increase in provisions
related to accounts with arrears of three months or more and a
further increase of GBP15.8m related to changes in the credit
profile of borrowers as they transitioned through modelled IFRS 9
impairment stages. Individually assessed provision increases and
other items totalled GBP3.3m.
Integration costs
The Group ceased recognising expenses as related to integration
on the third anniversary of combination with CCFS in October
2022.
In the prior period, GBP3.7m of integration expenses largely
related to advice on the Group's future operating structure and
redundancy costs due to the transition to the new operating
model.
Balance sheet growth
On a statutory basis, net loans and advances to customers grew
by 4% to GBP24,586.8m as at 30 June 2023 (31 December 2022:
GBP23,612.7m) reflecting originations of GBP2.3bn in the first
half. Excluding the impact of the adverse EIR adjustment, the
statutory net loans and advances to customers would have grown by
5%.
Total assets grew by 4% to GBP28,784.9m (31 December 2022:
GBP27,567.5m) largely due to the growth in loans and advances to
customers and higher liquid assets.
On a statutory basis, retail deposits increased by 5% to
GBP20,713.7m as at 30 June 2023 (31 December 2022: GBP19,755.8m) as
the Group continued to attract new savers. The Group complemented
its retail deposits funding with drawings under the Bank of
England's schemes. During the first half, the Group repaid
GBP300.9m of funding under the Indexed Long-Term Repo scheme and
drawings under the Term Funding Scheme for SMEs remained unchanged
from GBP4.2bn at the end of 2022.
Liquidity
OSB and CCFS operate under the Prudential Regulation Authority's
liquidity regime and are managed separately for liquidity risk.
Each Bank holds its own significant liquidity buffer of liquidity
coverage ratio (LCR) eligible high-quality liquid assets
(HQLA).
Each Bank operates within a target liquidity runway in excess of
the minimum LCR regulatory requirement, which is based on internal
stress testing. Each Bank has a range of contingent liquidity and
funding options available for possible stress periods.
As at 30 June 2023, OSB had GBP1,401.2m and CCFS had GBP1,760.0m
of HQLA (31 December 2022: GBP1,494.1m and GBP1,522.8m,
respectively).
The Group also held portfolios of unencumbered prepositioned
Bank of England level B and C eligible collateral in the Bank of
England Single Collateral Pool.
As at 30 June 2023, OSB had a liquidity coverage ratio of 234%
and CCFS 162% (31 December 2022: 229% and 148%, respectively), both
significantly in excess of the regulatory minimum of 100% plus
Individual Liquidity Guidance.
Capital
OneSavings Bank plc's solo capital position remained strong,
with a CET1 ratio of 15.7% and a total capital ratio of 19.3% as at
the end of June 2023 (31 December 2022: 18.4% and 20.0%,
respectively). Both ratios reflect the impact of lower profit in
the period due to the adverse EIR adjustment, which reduced the
CET1 ratio by 1.2%.
1. See the reconciliation of statutory to underlying results
below.
2. Effective tax rate excludes GBP0.2m (H1 2022: GBP0.4m) of
adjustments relating to prior periods.
Summary underlying results
Alternative performance measures
The Group presents alternative performance measures (APMs)
below, as Management believe they provide a more consistent basis
for comparing the Group's performance between financial
periods.
Underlying results for the six months to 30 June 2023 and 30
June 2022 exclude integration costs and other acquisition-related
items.
APMs reflect an important aspect of the way in which operating
targets are defined and performance is monitored by the Board.
However, any APMs in this document are not a substitute for IFRS
measures and readers should consider the IFRS measures as well
which can be found above.
For the reconciliation between APMs and the statutory
equivalents, see the Appendix.
H1 2023 H1 2022
Summary Profit or Loss GBPm GBPm
Net interest income 280.3 369.2
Net fair value (loss)/gain on financial instruments (12.1) 11.1
Other operating income 2.7 3.7
Administrative expenses (109.2) (89.1)
Provisions (0.6) 1.2
Impairment of financial assets (44.5) (2.0)
Profit before tax 116.6 294.1
--------- ---------
Profit after tax 87.9 223.3
H1 2023 H1 2022
Key ratios(1)
Net interest margin 203bps 302bps
Cost to income ratio 40% 23%
Management expense ratio 78bps 72bps
Loan loss ratio 37bps 2bps
Return on equity 8% 24%
30-Jun-23 31-Dec-22
GBPm GBPm
Extracts from the Statement of Financial Position
Loans and advances to customers 24,547.5 23,529.8
Retail deposits 20,713.5 19,755.2
Total assets 28,749.1 27,488.4
1. For more detail on the calculation of key ratios, see the
Appendix.
Underlying profit
The Group's underlying profit before tax decreased by 60% to
GBP116.6m compared with GBP294.1m in the first half of 2022, with
the benefit of net loan book growth and improved margins more than
offset by the adverse underlying EIR adjustment of GBP180.7m as
well as a higher impairment charge and higher administrative
expenses.
Underlying profit after tax was GBP87.9m, down 61% (H1 2022:
GBP223.3m) broadly in line with the decrease in profit before tax.
The Group's effective tax rate on an underlying basis remained
broadly stable at 24.6% for the first half of 2023 (H1 2022:
24.1%).
On an underlying basis, return on equity for the first half of
2023 reduced to 8% from 24% in the prior period reflecting the
reduction in profitability.
Net interest income
Underlying net interest income decreased by 24% to GBP280.3m in
the first half of 2023 (H1 2022: GBP369.2m) as the benefit of net
loan book growth and improved margins was more than offset by the
adverse EIR adjustment of GBP180.7m on an underlying basis (H1
2022: GBP0.3m). The adverse EIR adjustment primarily related to the
expectation that Precise Mortgages borrowers would spend less time
on the higher reversionary rate before refinancing based on
recently observed behavioural trends.
Underlying net interest margin reduced by 99bps to 203bps in the
first half (H1 2022: 302bps), as the benefit of base rate rises was
more than offset primarily by the adverse EIR adjustment which
accounted for 130bps of underlying NIM.
Net fair value (loss)/gain on financial instruments
Underlying net fair value loss on financial instruments of
GBP12.1m in the first half of 2023 (H1 2022: GBP11.1m gain)
included a loss of GBP29.0m (H1 2022: GBP4.3m) from hedge
ineffectiveness, a gain on unmatched swaps of GBP17.1m (H1 2022:
GBP14.0m) and a GBP1.2m loss from the amortisation of hedge
accounting inception adjustments (H1 2022: GBP6.5m gain). Other
hedging and fair value movements amounted to a gain of GBP1.0m (H1
2022: GBP5.1m loss).
The loss in respect of the ineffective portion of hedges arose
from recent swap volatility and will unwind over the remaining life
of the hedged fixed rate retail savings bonds and mortgages.
The net gain on unmatched swaps relates primarily to fair value
movements on mortgage pipeline swaps, prior to them being matched
against completed mortgages, and was due to an increase in outlook
on the SONIA yield curve. The Group economically hedges its
committed pipeline of mortgages and this unrealised gain unwinds
over the life of the swaps through hedge accounting inception
adjustments.
Other operating income
On an underlying basis, other operating income was GBP2.7m in
the first half of 2023 (H1 2022: GBP3.7m) and mainly comprised
CCFS' commissions and servicing fees, including those relating to
securitised loans which have been deconsolidated from the Group's
balance sheet.
Administrative expenses
Underlying administrative expenses increased by 23% to GBP109.2m
in the first half of 2023 (H1 2022: GBP89.1m) largely due to the
anticipated impact of inflation and planned investment in people
and operations.
The Group's underlying management expense ratio increased to
78bps for the first half of 2023 (H1 2022: 72bps) reflecting higher
administrative expenses and the underlying cost to income ratio
increased to 40% (H1 2022: 23%) as a result of lower income in the
period, following the adverse EIR adjustment.
Impairment of financial assets
The Group recorded an underlying impairment charge of GBP44.5m
in the first half of 2023 (H1 2022: GBP2.0m) representing an
underlying loan loss ratio of 37bps (H1 2022: 2bps).
The Group adopted more adverse forward-looking macroeconomic
scenarios in its IFRS 9 models which together with house price
moderation in the period accounted for a GBP12.6m increase in
provisions. Enhancements to models and updates to post model
adjustments to reflect the deterioration in the outlook, led to an
increase of GBP8.4m. In addition, a GBP4.5m increase in provisions
related to accounts with arrears of three months or more and a
further increase of GBP15.8m related to the change in the credit
profile of borrowers as they transitioned through modelled IFRS 9
impairment stages. Individually assessed provision increases and
other items totalled GBP3.2m.
Balance sheet growth
On an underlying basis, net loans and advances to customers were
GBP24,547.5m (31 December 2022: GBP23,529.8m) an increase of 4%,
reflecting gross originations of GBP2.3bn in the first six months
of 2023. Excluding the impact of the adverse underlying EIR
adjustment, underlying net loans and advances to customers would
have grown by 5%.
Total underlying assets grew by 5% to GBP28,749.1m (31 December
2022: GBP27,488.4m) largely due to the growth in loans and advances
to customers and higher liquid assets.
On an underlying basis, retail deposits increased by 5% to
GBP20,713.5m as at 30 June 2023 (31 December 2022: GBP19,755.2m) as
the Group continued to attract new savers.
Reconciliation of statutory to underlying results
HY 2023 HY 2022
Statutory Reverse Reverse
results acquisition- related and exceptional items Underlying results Statutory results acquisition- related and exceptional items Underlying results
GBPm GBPm GBPm GBPm GBPm GBPm
------------------
Net interest
income 237.5 42.81 280.3 343.4 25.8 369.2
Net fair value
(loss)/gain on
financial
instruments (8.1) (4.0)(2) (12.1) 16.4 (5.3) 11.1
Other operating
income 2.7 -- 2.7 3.7 -- 3.7
------------------
Total income 232.1 38.8 270.9 363.5 20.5 384.0
Administrative
expenses (110.2) 1.0(3) (109.2) (91.3) 2.2 (89.1)
Provisions (0.6) -- (0.6) 1.2 -- 1.2
Impairment of
financial
assets (44.6) 0.1(4) (44.5) (1.6) (0.4) (2.0)
Integration
costs -- -- -- (3.7) 3.7 --
Profit before
tax 76.7 39.9 116.6 268.1 26.0 294.1
Profit after
tax 59.3 28.6 87.9 208.9 14.4 223.3
Summary Balance Sheet FY 2022
Loans and
advances to
customers 24,586.8 (39.3)(5) 24,547.5 23,612.7 (82.9) 23,529.8
Other financial
assets 4,067.9 4.2(6) 4,072.1 3,878.9 9.1 3,888.0
Other
non-financial
assets 130.2 (0.7)(7) 129.5 75.9 (5.3) 70.6
------------------------------------------- ------------------
Total assets 28,784.9 (35.8) 28,749.1 27,567.5 (79.1) 27,488.4
Amounts owed to
retail
depositors 20,713.7 (0.2)(8) 20,713.5 19,755.8 (0.6) 19,755.2
Other financial
liabilities 5,960.4 0.2(9) 5,960.6 5,548.5 0.8 5,549.3
Other
non-financial
liabilities 45.0 (9.4)(10) 35.6 61.4 (30.2) 31.2
------------------
Total
liabilities 26,719.1 (9.4) 26,709.7 25,365.7 (30.0) 25,335.7
Net assets 2,065.8 (26.4) 2,039.4 2,201.8 (49.1) 2,152.7
------------------
Notes to the reconciliation of statutory to underlying results
table:
1. Amortisation of the net fair value uplift to CCFS' mortgage
loans and retail deposits on Combination
2. Inception adjustment on CCFS' derivative assets and
liabilities on Combination
3. Amortisation of intangible assets recognised on
Combination
4. Adjustment to expected credit losses on CCFS loans on
Combination
5. Recognition of a fair value uplift to CCFS' loan book less
accumulated amortisation of the fair value uplift and a movement on
credit provisions
6. Fair value adjustment to hedged assets
7. Adjustment to deferred tax asset and recognition of acquired
intangibles on Combination
8. Fair value adjustment to CCFS' retail deposits less
accumulated amortisation
9. Fair value adjustment to hedged liabilities
10. Adjustment to deferred tax liability and other
acquisition-related adjustments
Risk review
Key areas of focus during the six months to 30 June 2023
The Group continued to deliver against all key strategic risk
objectives during the first six months of 2023, including the
priority areas set out in the 2022 Annual Report and Financial
Statements. The Group continues to perform within the confines of a
prudent risk appetite.
The macroeconomic outlook for the United Kingdom has
deteriorated since the end of 2022, with continued inflationary
pressure resulting in further tightening of monetary policy.
Consequently, inflation and interest rate levels are expected to
remain at a high level over a more protracted time frame.
The Group's credit performance has continued to exhibit
underlying resilience due to the credit profile of its borrowers,
robust affordability assessments and supporting security. The
macroeconomic outlook has been reflected in the Group's modelled
credit risk assessment, with actual portfolio performance starting
to show modest increases in arrears and staging migrations. The
Group remains confident in its cautious and proactive approach to
expected credit loss provisioning.
The business impact of an extended period of economic stress, in
particular rising inflation and interest rates has impacted
mortgage affordability and refinancing. The rapid and unplanned
Bank Base Rate rises and volatile swap spreads led to unexpected
and unpredictable customer behavioural changes resulting in an
adverse EIR adjustment. The Group continues to actively monitor
observed customer behaviours and reflect them in its risk based
analytics.
The Group's risk management framework ensured that risks
continue to be identified, monitored and managed effectively, and
has enabled the Group to actively manage its risk profile. The
Group continues to take appropriate actions to support its
customers through this challenging period.
A full review of the risk appetite statements and limits across
all principal risk types was undertaken during the six months to 30
June 2023, in the context of the Group's available financial
resources, strategic objectives and regulatory expectations. The
Group's risk appetite is underpinned by detailed stress testing
analysis which considers performance over a range of extreme but
plausible scenarios, and therefore provides the Board with
confidence that the Group has more than sufficient financial
resources and operational capacity to manage the impact of the
ongoing economic and operating uncertainty.
In the context of the deteriorating macroeconomic outlook, the
Group's underlying credit profile remained resilient. Loan book
growth has been subject to strict lending criteria, whilst LTV
levels have been adjusted to reflect recent reductions in property
prices, where average LTV levels remain strong. The LTV profile of
the Group's lending portfolios protects the Group from realising
losses, should an account have to be repossessed and the property
sold. Rising interest rates have impacted loan affordability and
therefore interest coverage ratios for new lending have been
impacted, but remain at acceptable levels. The Group has
successfully leveraged its improved credit risk analytics and
governance arrangements to actively monitor and manage the Group's
credit profile, taking timely actions where required.
During the six months to 30 June 2023 the Group continued to
organically generate capital and funded growth through retail and
wholesale channels. The Group continued to operate with material
capital and liquidity surpluses to its regulatory and internal
stress based requirements. A number of reverse stress tests were
performed to identify the severity of macroeconomic scenarios that
would be required to result in the Group and its entities breaching
minimum regulatory requirements. These assessments were utilised in
the going concern assessment, which demonstrated the Group's
inherent resilience to implausible stress scenarios.
The Group experienced heightened operational activity as a
result of the level and frequency of base rate increases. The
Group's operating model performed resiliently, benefiting from the
continued investment in operational capabilities.
During the six months to 30 June 2023 the Group continued to
make good progress across a number of key regulatory
initiatives.
The Group continues to actively engage with the PRA on the
timing of the IRB application relating to rating systems covering
the core Buy-to-let and residential first charge mortgages. The
Group is ready to submit module 1 when regulatory consent is
provided.
Preparations for achieving compliance with the FCA's new
Consumer Duty regulations, which came into force at the end of
July, have progressed as planned, and the Group is well positioned
to demonstrate compliance. The Group continued to enhance its
resolution capabilities through the issuance of Tier 2 capital and
further embedding of capabilities across all aspects of the
Resolvability Assessment Framework.
Ensuring that the Group continued to maintain appropriate
expected credit loss provisions was an important consideration of
the Board and senior management. The Group undertook detailed
analysis to assess portfolio risks and considered if these were
adequately accounted for in IFRS 9 models and frameworks. The Group
identified a number of areas that continued to require post-model
adjustments, most notably to account for the heightened and
extended cost of borrowing pressure, which in combination with
updated macroeconomic scenarios, resulted in an increase in
provisions and a more pronounced increase in the balances of
accounts in stage 2. Expected credit loss provisions were assessed
using the Group's IFRS 9 methodologies, individually assessed
provisioning approaches and portfolio segment-based stress and
sensitivity analysis. Benchmarking analysis was provided to the
Board and senior management, enabling review and challenge of
provision coverage levels and underlying macroeconomic
scenarios.
The Group made progress in its approach to managing climate risk
by further embedding its climate risk management framework. A
dedicated ESG Technical Committee ensures that enhancements are
delivered as required.
Principal risks and uncertainties
The Board is responsible for determining the nature and extent
of the principal risks it is willing to take in order to achieve
its strategic objectives.
During the six months to 30 June 2023, notwithstanding the
economic and business uncertainties the Board did not see a
significant change in the principal risks and uncertainties
disclosed in the Risk review section of the 2022 Annual Report and
Financial Statements on pages 41 to 53, which can be accessed via
our website at
https://www.globenewswire.com/Tracker?data=CxTrtUWxVePlyzIKsWqI6l4FP11wSKQuFLeGGIRKKGxxyOdI3Frk1mgAPPgYPu4wlq_tCx6FdEQ6kXpwtOkbtA==
www.osb.co.uk.
The table below provides a high-level overview of the principal
risks which the Board believes are the most material with respect
to potential adverse impact on the business model, future financial
performance, solvency and liquidity.
Principal risks Key mitigating actions
----------------- -----------------------------------------------------------
Strategic and -- Regular monitoring by the Board and the Group
business risk Executive Committee of business and financial
performance against the Group's strategic agenda and
risk appetite.
-- The financial plan is subject to regular reforecasts.
-- The Group continued to utilise and enhance its stress
testing capabilities to assess and minimise potential
areas of macroeconomic vulnerability.
-- The Group has a diversified suite of products and
capabilities to utilise, together with significant
financial resources to support a response to changes
in competition.
----------------- -----------------------------------------------------------
Reputational risk -- Post implementation of Consumer Duty rules the Group
has further enhanced its assessment and monitoring of
customer outcomes and behaviours. In particular, the
Group is actively monitoring and taking appropriate
actions to reflect changing customer behaviours and
trends.
-- The Group has a culture and commitment to being open
and transparent in communication with all key
stakeholders and has established processes to
proactively identify and manage potential sources of
reputational risk, for instance:
-- The Group actively monitors customer and
broker feedback (through social media and
Trustpilot channels, NPS and CSAT surveys) to
assess the ongoing appropriateness of service
levels.
-- Established processes are in place to review,
assess and remediate complaints in a timely
manner.
-- The Group also actively monitors external
press reports, sentiment of industry banking
analysts, its investors, performance of key
third party suppliers and interactions with
regulators.
----------------- -----------------------------------------------------------
Credit risk Individual borrower defaults:
-- Across both OSB and CCFS a robust underwriting
assessment is undertaken to ensure a customer has the
ability and propensity to repay, and sufficient
security is available to support the new loan
requested.
-- Should there be problems with a loan, the Collections
and Recoveries team work with customers who are
unable to meet their loan service obligations to
reach a satisfactory conclusion while adhering to the
principle of treating customers fairly.
Macroeconomic downturn
-- The Group works within portfolio limits on LTV,
affordability, individual exposure, sector and
geographic concentrations that are approved by the
Group Risk Committee and the Board. These are
reviewed on a semi-annual basis.
-- Stress testing is performed to ensure that the Group
maintains sufficient capital to absorb losses in an
economic downturn and continues to meet its
regulatory requirements.
-- The Group notes the impact of cost of living and cost
of borrowing on customer profile and behaviour.
Wholesale credit risk
-- The Group transacts only with high quality wholesale
counterparties.
-- Derivative exposures include collateral agreements to
mitigate credit exposures.
----------------- -----------------------------------------------------------
Market risk -- The Group's Treasury function utilises a combination
of offsetting assets and liabilities with similar
tenors, allocation of reserves and interest rate
swaps to effectively manage duration risk.
-- Due to the Group balance sheet structure, no active
management of basis risk was required during the
period.
-- IRRBB is monitored via a comprehensive range of
techniques and scenarios including both economic
value and earnings measures at both the Interest Rate
Risk in the Banking Book Working Group and the Group
Assets and Liabilities Committee.
----------------- -----------------------------------------------------------
Liquidity and -- The Group's funding strategy is focused on a highly
funding risk stable retail deposit franchise.
-- The Group's large number of depositors provide
diversification, where a high proportion of balances
are covered by the FSCS protection scheme, largely
mitigating the risk of a retail run.
-- The Group performs in-depth liquidity stress testing
and maintains a liquid asset portfolio sufficient to
meet obligations under stress.
-- The Group proactively manages its savings proposition
through both the Liquidity Working Group and the
Group Assets and Liabilities Committee in the context
of macroeconomic outlook, changing market dynamics
and customer behaviour.
-- The Group continuously monitors wholesale funding
markets and is experienced in taking proactive
management actions where required.
-- The Group has a range of wholesale options available,
including securitisation programmes and repo or sale
of held notes, as well as retail funding via its
strong franchises, to replace the TFSME borrowing
gradually over the next few years ahead of the
maturity of this funding in 2025.
----------------- -----------------------------------------------------------
Solvency risk -- The Group operates from a strong capital position and
has a consistent record of strong profitability.
-- With respect to MREL, OSB GROUP PLC has an
established issuance programme and a capital plan in
place to ensure any actions required to meet
requirements are fully understood. Market uncertainty
can impact investor appetite, which may require the
Group to take management actions, including applying
for a "flexible add on" extension to the MREL
requirements of up to two years or making changes to
planned capital distributions.
-- The Group actively monitors its capital requirements
and resources against financial forecasts and plans
and undertakes stress testing analysis to subject its
solvency ratios to extreme but plausible stress
scenarios.
-- The Group also holds prudent levels of capital
buffers based on CRD IV requirements and expected
balance sheet growth.
-- The Group engages actively with regulators, industry
bodies and advisers to keep abreast of potential
changes and provides feedback in consultation
processes.
-- Uncertainty remains around the impact of the
finalised Basel 3.1 rules, however the Group has
assessed the potential impacts over a range of
outcomes.
----------------- -----------------------------------------------------------
Operational risk IT security (including cyber risk)
-- The Group's programme of IT and cyber security
improvements continued with the aim of enhancing its
protection against IT security threats, deploying a
series of tools designed to identify and prevent
network/ system intrusions. This is further supported
by documented and tested procedures intended to
ensure the effective response to a security breach.
-- The Group's ongoing penetration testing continues to
drive enhancements by identifying potential areas of
risk.
IT failure
-- The Group continues to invest in improving the
resilience of its core infrastructure and is
investing in new technology to replace legacy
architecture. It has identified its prioritised
business services and the infrastructure that is
required to support them. Tests are performed
regularly to validate the Group's ability to recover
from an incident within approved tolerances.
Data quality and completeness
-- The Group's Data Strategy Programme is designed to
ensure a consistent approach to the maintenance and
use of data. This includes documented procedures and
frameworks and also tools intended to improve the
consistency of data use.
Change management
-- The Group recognises that implementing change
introduces significant operational risk and has
therefore implemented a series of control gateways
and prioritisation approaches designed to ensure that
the change management portfolio is adequately
budgeted and resourced and that each stage of the
change management process has the necessary level of
oversight.
----------------- -----------------------------------------------------------
Conduct risk -- The Group's culture is clearly defined and monitored
via its Purpose, Vision and Values driven behaviours.
-- The Group has a strategic commitment to provide
simple, customer-focused products. In addition, a
Product Governance framework is established to
oversee both the origination of new products and to
review the ongoing suitability of the existing
product suite.
-- The Group has an embedded Conduct Risk Management
Framework which clearly defines roles and
responsibilities for conduct risk management and
oversight across the Group's three lines of defence.
----------------- -----------------------------------------------------------
Compliance and Prudential regulatory changes
regulatory risk -- The Group has an effective horizon scanning process
to identify regulatory change.
-- All significant regulatory initiatives are managed by
structured programmes overseen by the Project
Management team and sponsored at Executive level.
-- The Group has proactively sought external expert
opinion to support interpretation of the requirements
and validation of its response, where required.
Conduct regulation
-- The Group has a programme of regulatory horizon
scanning linking into a formal regulatory change
management programme. In addition, the focus on
simple products and a customer-oriented culture means
that current practice may not have to change
significantly to meet new conduct regulations.
-- All Group entities utilise underwriting, arrears and
forbearance and vulnerable customer policies which
are designed to comply with regulatory principles,
rules and expectations. These policies articulate the
Group's commitment to ensuring that all customers,
especially those who are vulnerable or experiencing
financial hardship, are treated fairly, consistently
and in a way that considers their individual needs
and circumstances.
-- The Group does not tolerate any systematic failure to
deliver fair customer outcomes. On an isolated basis,
incidents can result in detriment due to human and/or
operational failures. Where such incidents occur,
they are thoroughly investigated, and the appropriate
remedial actions are taken to address any customer
detriment and prevent recurrence.
----------------- -----------------------------------------------------------
Financial crime -- The Group has an established screening programme that
risk is deployed at the point of origination and on a
regular basis throughout the customer lifecycle.
Where applicable, enhanced due diligence is applied
to ensure that any increase in risk is appropriately
managed and any activity remains within risk
appetite.
-- The Group has a horizon scanning programme that
identifies changes to money laundering regulations
and any other financial crime related legislation to
ensure that it complies with all regulatory
obligations.
-- The Group continues to invest in a range of systems
and controls that are deployed across its product
range in order to detect and prevent the exposure to
fraud through the customer lifecycle.
-- All new business applications are subject to a range
of controls to identify and mitigate fraud. Customer
activity is monitored in order to detect suspicious
activity or behaviour that may be indicative of
fraud.
----------------- -----------------------------------------------------------
Emerging risks
The Group proactively scans for emerging risks which may have an
impact on its operations and strategy. The Group considers its top
emerging risks to be:
Emerging risks Key mitigating actions
----------------------------------------------------------- -----------------------------------------------------------
Political and macroeconomic uncertainty -- The Group has mature and robust monitoring processes
-- The Group's lending activity is predominantly focused and via various stress testing activities (i.e. ad
in the United Kingdom (with a legacy book of hoc, risk appetite and Internal Capital Adequacy
mortgages in the Channel Islands) and, as such, will Assessment Process (ICAAP)) understands how the Group
be impacted by any risks emerging from changes in the performs over a variety of macroeconomic stress
macroeconomic environment. scenarios and has developed a suite of early warning
-- Rising inflation and interest rates pose risks to the indicators, which are closely monitored to identify
Group's loan portfolio performance. changes in the economic environment.
-- Changes in customer behaviour can result in material -- The Group actively monitors customer behaviour and
changes to assumptions used in EIR calculations. adjusts its risk assessments accordingly.
-- The Board and management review detailed portfolio
reports to identify any changes in the Group's risk
profile.
----------------------------------------------------------- -----------------------------------------------------------
Climate change
Climate change risks include: -- During the period, the Group further embedded its
-- Physical risks which relate to specific weather approach to climate risk management, which included
events, such as storms and flooding, or to the development of a climate risk appetite and
longer-term shifts in the climate, such as rising sea enhancement of the climate risk framework.
levels. These risks could include adverse movements
in the value of certain properties that are in
coastal and low-lying areas or located in areas prone
to increased subsidence and heave.
-- Transitional risks may arise from the adjustment
towards a low-carbon economy, such as tightening
energy efficiency standards for domestic and
commercial buildings. These risks could include a
potential adverse movement in the value of properties
requiring substantial updates to meet future energy
performance requirements.
-- Reputational risk arising from a failure to meet
changing societal, investor or regulatory demands.
----------------------------------------------------------- -----------------------------------------------------------
Model risk -- The Group has well-established model risk governance
The risk of financial loss, adverse arrangements in place, with Board and Executive
regulatory outcomes, reputational Committees in place to ensure robust oversight of the
damage or customer detriment resulting Group's model risk profile.
from deficiencies in the development, -- Established and maturing model governance, monitoring
application or ongoing operation and validation frameworks, procedures and standards.
of models and ratings systems. -- Dedicated resources are in place to ensure that model
The Group also notes changes in governance arrangements continue to meet any changes
industry best practice with respect in industry and regulatory expectations.
to model risk management.
----------------------------------------------------------- -----------------------------------------------------------
Regulatory change
The Group remains subject to high -- The Group has established horizon scanning
levels of regulatory oversight capabilities, together with dedicated prudential and
and an extensive and broad ranging conduct regulatory experts in place to ensure the
regulatory change agenda. The Group Group manages future regulatory changes effectively.
is therefore required to respond
to prudential and conduct-related -- The Group also has strong relationships with
regulatory changes, taking part regulatory bodies, and via membership of UK Finance
in thematic reviews, as required. contributes to upcoming regulatory consultations.
----------------------------------------------------------- -----------------------------------------------------------
Risk Profile Performance Overview
Credit risk
In the context of the deteriorating macroeconomic outlook, the
Group's underlying credit profile remained resilient during the six
months to 30 June 2023.
Demand for the Group's mortgage products remained strong,
resulting in statutory net loans and advances increasing to
GBP24.6bn as at 30 June 2023 from GBP23.6bn at the end of 2022.
Loan book growth continued to be predominantly driven by new buy to
let and residential first charge mortgage lending.
Average weighted interest coverage ratios across Buy-to-Let
originations remained strong at 178% for OSB and 154% for CCFS (30
June 2022: 211% for OSB and 197% for CCFS). The reduction was
driven by increased mortgage borrowing costs as the Group repriced
its open market products, as a result of the rapid rise in interest
rates relative to the movements in rental income received against
the property.
The proportion of the Group's residential first charge mortgage
portfolios with higher loan to income multiples (greater than four)
remained low.
The Group's prudent risk appetite and well-established
underwriting processes supported new mortgage lending at sensible
average weighted LTV levels of 69% for OSB and 66% for CCFS (30
June 2022: OSB 70%, CCFS 72%).
Some softening of house prices was observed resulting in the
average weighted LTV of the Group's book increasing from 60% as at
31 December 2022 to 63% as at 30 June 2023. The Group's ability to
absorb any future economic shocks remains robust. The total average
book LTV ratios remained resilient for OSB at 62% (31 December
2022: 59%) and 64% for CCFS (31 December 2022: 63%).
Forward-looking internal and external credit scoring metrics
remained strong, taking into account internal performance and
customers' wider credit obligation performance.
Group balances with greater than three months arrears remained
low at 1.2% (31 December 2022: 1.1%). OSB's greater than three
months in arrears levels increased modestly to 1.3% (31 December
2022: 1.2%), whilst CCFS's increased to 1.0% (31 December 2022:
0.9%).
The levels of new forbearance requests remained low relative to
the total number of customers and outstanding balances.
Expected credit losses
The Group recorded a statutory impairment charge of GBP44.6m for
the six months to 30 June 2023 (H1 2022: GBP1.6m) which represented
a statutory loan loss ratio of 37bps compared to 1bp in the first
half of 2022.
The primary drivers of the impairment trends observed in the
period were as follows:
a. Macroeconomic impact
The Group continued to receive regular macroeconomic scenario
updates from its advisers, which were reviewed and discussed by
management and the Board, along with the probability weightings
applied to each scenario.
The macroeconomic scenarios utilised within the IFRS 9
provisioning process as at 30 June 2023 forecast an elevated
interest rate trajectory across all scenarios, with a more adverse
outlook and protracted recovery in house prices in the downside and
severe downside scenarios, which more than offset improvements in
other economic metrics. The probability weighting assigned to each
scenario remained unchanged from 31 December 2022. Under the IFRS 9
framework, forward looking forecasts pull forward future losses
therefore the updated scenarios resulted in further provisions
being raised during the reporting period to 30 June 2023.
Macroeconomic scenarios utilised within IFRS 9 impairment
calculations at 30 June 2023:
Scenario (%)(1)
---------- ----------- ------------ -----------------------------------------------------
Probability
weighting Economic Year Year Year Year Year
Scenario (%) measure end 2023 end 2024 end 2025 end 2026 end 2027
---------- ----------- ------------ --------- --------- --------- --------- ---------
Base case 40 GDP 0.4 0.8 1.5 2.3 1.6
---------- -----------
Unemployment 4.0 4.2 4.0 3.8 3.8
---------- -----------
House price
growth -5.0 -5.4 -0.3 4.5 5.3
CPI 3.8 2.6 0.9 1.2 1.9
Bank Base
Rate 5.8 5.6 4.3 3.1 2.1
---------- ----------- ------------ --------- --------- --------- --------- ---------
Upside 30 GDP 1.2 3.3 2.5 2.9 1.5
---------- -----------
Unemployment 3.8 3.7 3.7 3.6 3.6
---------- -----------
House price
growth -2.9 -3.1 1.8 5.9 5.2
CPI 4.4 3.8 1.3 1.1 1.8
Bank Base
Rate 6.5 6.8 5.4 4.4 3.4
---------- ----------- ------------ --------- --------- --------- --------- ---------
Downside 20 GDP -1.2 -2.3 0.9 2.0 1.6
---------- -----------
Unemployment 4.8 6.1 7.0 6.9 6.6
---------- -----------
House price
growth -8.3 -10.8 -5.1 2.3 5.7
CPI 2.7 1.2 0.5 1.1 1.7
Bank Base
Rate 5.1 4.6 3.1 1.8 1.3
---------- ----------- ------------ --------- --------- --------- --------- ---------
Severe
Downside 10 GDP -2.4 -4.9 0.2 1.6 1.7
---------- -----------
Unemployment 5.0 6.7 7.5 7.4 7.1
---------- -----------
House price
growth -10.8 -15.1 -9.5 -0.1 6.1
CPI 1.8 0.5 0.4 1.0 1.2
Bank Base
Rate 4.3 3.4 1.8 0.5 0.5
---------- ----------- ------------ --------- --------- --------- --------- ---------
1. Scenarios show annual movement for GDP and house price growth and CPI and
year end positions for unemployment and bank base rate. Commercial and
residential properties follow the same HPI forecast
In the upside scenario, the performance of the economy with
positive GDP and corporate resilience, drives continued inflation
beyond the 2% target for longer and the BoE Monetary Policy
Committee consider it appropriate to continue with the policy of
increasing base rate. The reverse happens in the downside scenarios
where negative GDP is paired with a quicker reduction in inflation
and the BoE has less reason to continue raising rates. High
inflation combined with a high interest rate risk in the downside
is captured by the PMAs.
The more adverse forward-looking macroeconomic scenarios in the
Group's IFRS 9 models which together with house price moderation in
the period accounted for a GBP12.6m increase in the impairment
charge.
b. Model enhancements and post model adjustments
The Group's technical Model Governance Committee receives
regular model performance reports prepared by the Group's Models
and Ratings function. Where required, proposals were made to ensure
that modelled estimates continued to mirror recently observed
outcomes. Prior to each reporting period the logic which determines
whether accounts not in arrears should be moved to stage 2 is
reviewed and some non-material adjustments were made to reflect
post pandemic behaviour.
The Group took further Post Model Adjustments (PMAs) to account
for risks not fully captured within the IFRS 9 framework, with an
additional GBP8.4m impairment charge driven primarily by the much
higher costs of borrowing for the Group's customers due to the
recent interest rate rises.
c. Arrears flow
Although the Group's arrears remained broadly stable, there was
an additional impairment charge of GBP4.5m driven by accounts with
arrears over three months.
d. Changes in credit risk profile
An impairment charge of GBP15.8m related to changes in the
credit profile of borrowers as they transitioned through modelled
IFRS 9 impairment stages. This charge included the flow of new and
closed business through impairment stages, but also where the Group
observed a significant increase in credit risk, higher default
rates, early arrears or forbearance.
e. Individually assessed provisions
The Group's specialist Real Estate Management and Collections
and Servicing teams maintain watchlists of loans where objective
evidence of impairment exists over a given exposure. For these
specific loans a detailed assessment of the collateral and
circumstances of the arrears is completed and, where required, an
individual impairment provision will be raised based on this
updated information which replaces any modelled provisions held.
During the six months to 30 June 2023, the Group raised a number of
additional individual provisions against a small number of
counterparties, which together with write-offs and other items
accounted for a further charge of GBP3.3m.
The table below indicates the provision coverage levels as at 30
June 2023:
Gross carrying Expected credit
amount loss Coverage ratio
As at 30 June 2023 GBPm GBPm %(1)
Stage 1 18,909.7 18.7 0.10%
Stage 2 5,175.9 66.7 1.29%
Stage 3 + POCI(2) 658.2 86.7 13.17%
Total 24,743.8 172.1 0.70%
Gross carrying Expected credit
amount loss Coverage ratio
As at 31 December 2022 GBPm GBPm %(1)
Stage 1 18,722.3 7.2 0.04%
Stage 2 4,417.1 50.9 1.15%
Stage 3 + POCI(2) 588.7 71.9 12.21%
Total 23,728.1 130.0 0.55%
1. Coverage ratios versus loans and advances is the total IFRS 9 provision
versus gross loans and advances.
2. POCI assets are purchased or originated credit impaired. These are
acquired loans that meet the Group's definition of default (90 days past
due or an unlikely to pay) at acquisition.
Provision levels further strengthened to a coverage ratio of
0.70% as at 30 June 2023 (31 December 2022: 0.55%). The increase
observed was driven by the deteriorating macroeconomic outlook
impacting LTV levels and the impact of revised scenarios used
within impairment calculations. Model and staging rule updates,
post model adjustment updates, individually assessed provisions
raised against a small number of loans and general credit profile
changes resulted in increased provision balances.
Liquidity and funding risk
Liquidity and funding performance became more challenging within
the reporting period, against a rising interest rate environment
and competitive retail savings market. The Group's Liquidity
Working Group continued to monitor daily liquidity reporting and
forecasting to ensure liquidity levels remained at target
levels.
The Group continued to be predominantly funded by retail
savings. Only 7.1% of direct deposits remain above the FSCS
protection limit as at 30 June 2023 (31 December 2022: 6.8%). All
deposits received via deposit aggregators are assumed not to be
protected by FSCS, as the Group is not provided with the individual
customer data for these deposits. Diversification of funding was
provided by borrowing from the Bank of England under its funding
schemes. As at 30 June 2023, the Group's borrowing under the Term
Funding Scheme for SMEs were GBP4.2bn, unchanged from the end of
2022. In the period, the Group repaid GBP301m of funding under the
Indexed Long-Term Repo scheme. Securitisation remains central to
the Group's liability management strategy, as well as being a key
funding source. In June, the Group completed a GBP330m
securitisation of owner-occupied prime mortgages originated by
Precise Mortgages under the CMF programme.
Liquidity coverage ratios remained strong at 234% for OSB and
162% for CCFS (31 December 2022: OSB 229% and CCFS 148%) versus the
regulatory minimum of 100% plus Individual Liquidity Guidance.
Market risk
Interest rate risk is the key market risk the Group is exposed
to. Gap and basis risk are managed within defined risk appetite
limits for each bank. The Group's Treasury function actively hedges
risk to match the timing of cash flows from assets and liabilities
for each bank.
The Group has a small amount of foreign exchange exposure, due
to the rupee denominated running costs of the OSB India operation.
Rupee denominated running costs during the period to 30 June 2023
totalled GBP7.2m (30 June 2022: GBP5.1m).
Solvency risk
Solvency risk is a function of balance sheet growth,
profitability, access to capital markets and regulatory changes.
During the six months to 30 June 2023, the Group's balance sheet
grew, however the asset mix continued to trend towards less
capital-intensive products. The Group remained profitable within
the period and the OSB's solo capital requirements remained strong
with the CET1 ratio at 15.7% (31 December 2022: 18.4%).
The Group's CET1 ratio benefitted from profitability in the
period which, excluding the adverse EIR adjustment, increased CET1
ratio by 2.0%, this was more than offset by loan book growth which
reduced CET1 by 0.8%. The adverse EIR adjustment reduced the CET1
by a further 1.2% and other non-cash items by 0.8%.
The Group remains cognisant of the ongoing macroeconomic
uncertainty, which could result in a range of risk profile outcomes
impacting capital levels, together with future changes to the
Group's capital requirements including the broad range of potential
outcomes with respect to Basel 3.1 reforms when these are adopted
in the UK.
Conduct risk
The Group considers its culture and behaviour in ensuring the
fair treatment of customers and in maintaining the integrity of the
market sub-segments in which it operates to be a fundamental part
of its strategy and a key driver to sustainable profitability and
growth.
The Group does not tolerate any systemic failure to deliver fair
customer outcomes. On an isolated basis, incidents can result in
detriment owing to human and/or operational failures. Where such
incidents occur, they are thoroughly investigated, and the
appropriate remedial actions are taken to address any customer
detriment and to prevent recurrence.
The Group considers effective conduct risk management to be a
product of the positive behaviour of all employees, influenced by
the customer-centric culture throughout the organisation and
therefore continues to promote a strong sense of awareness and
accountability. While effective conduct risk management reduces the
risk of failing to deliver fair customer outcomes going forward,
the Group also conducts backwards-looking reviews to ensure no
failure has occurred.
OneSavings Bank plc
Interim Report for the six months ended 30 June 2023
Statement of Directors' Responsibilities
We, the Directors listed below, confirm that to the best of our
knowledge:
-- the interim condensed financial statements have been prepared
in accordance with IAS 34, Interim Financial Reporting, as adopted
by the United Kingdom (UK);
-- the interim management report includes a fair review of the
information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency
Rules, being an indication of important events that have occurred
during the first six months of the financial year and their impact
on the interim condensed financial statements; and a description of
the principal risks and uncertainties for the remaining six months
of the financial year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency
Rules, being related party transactions that have taken place in
the first six months of the financial year and that have materially
affected the financial position or performance of the Group during
that period; and any changes in the related party transactions
described in the last Annual Report and Financial Statements that
could do so.
Kal Atwal (Appointed on 7 February 2023)
Andy Golding
Noël Harwerth
Sarah Hedger
Rajan Kapoor
April Talintyre
Simon Walker
David Weymouth
By order of the Board
Date: 11 August 2023
OneSavings Bank plc
Interim Report for the six months ended 30 June 2023
Independent Review Report to OneSavings Bank plc
Conclusion
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2023 which comprises the Condensed
Consolidated Statement of Comprehensive Income, the Condensed
Consolidated Statement of Financial Position, the Condensed
Consolidated Statement of Changes in Equity, the Condensed
Consolidated Statement of Cash Flows and related notes 1 to 33.
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 2023 is not prepared, in all material respects, in accordance
with United Kingdom adopted International Accounting Standard 34
and the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
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 for use in the
United Kingdom (ISRE (UK) 2410). A review of interim financial
information consists of making inquiries, 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, the annual financial statements of the
Group are prepared in accordance with United Kingdom adopted
international accounting standards. The condensed set of financial
statements included in this half-yearly financial report has been
prepared in accordance with United Kingdom adopted International
Accounting Standard 34, "Interim Financial Reporting".
Conclusion 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 the directors have inappropriately
adopted the going concern basis of accounting or that the directors
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 ISRE (UK) 2410; 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 Disclosure Guidance and
Transparency Rules of the United Kingdom's Financial Conduct
Authority.
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 financial 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 conclusions, including our conclusion 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 ISRE
(UK) 2410. Our work has been undertaken so that we might state to
the Group those matters we are required to state to it in an
independent review report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility
to anyone other than the Group, for our review work, for this
report, or for the conclusions we have formed.
Deloitte LLP
Statutory Auditor
London, United Kingdom
11 August 2023
OneSavings Bank plc
Interim Report for the six months ended 30 June 2023
Condensed Consolidated Statement of Comprehensive Income
Six months Six months
ended ended
30-Jun-23 30-Jun-22
(Unaudited) (Unaudited)
Note GBPm GBPm
Interest receivable and similar income 3 695.8 452.2
Interest payable and similar charges 4 (458.3) (108.8)
Net interest income 237.5 343.4
Fair value (losses)/gains on financial
instruments 5 (8.1) 16.4
Other operating income 2.7 3.7
Total income 232.1 363.5
Administrative expenses 6 (110.2) (91.3)
Provisions 24 (0.6) 1.2
Impairment of financial assets 17 (44.6) (1.6)
Integration costs 7 - (3.7)
Profit before taxation 76.7 268.1
Taxation 8 (17.4) (59.2)
Profit for the period 59.3 208.9
Other comprehensive expense
Items which may be reclassified to profit
or loss:
Fair value changes on financial instruments
measured at fair value through other comprehensive
income (FVOCI):
Arising in the period (0.4) (0.7)
Tax on items in other comprehensive expense 0.1 0.1
Revaluation of foreign operations (0.5) 0.1
Other comprehensive expense (0.8) (0.5)
---------------------------------------------------- ---- ----------- -----------
Total comprehensive income for the period 58.5 208.4
The above results are derived wholly from continuing
operations.
Notes 1 to 33 form part of these condensed consolidated
financial statements.
OneSavings Bank plc
Interim Report as at 30 June 2023
Condensed Consolidated Statement of Financial Position
As at As at
30-Jun-23 31-Dec-22
(Unaudited) (Audited)
Note GBPm GBPm
Assets
Cash in hand 0.4 0.4
Loans and advances to credit institutions 11 3,617.0 3,365.7
Investment securities 12 348.7 412.9
Loans and advances to customers 13 24,586.8 23,612.7
Fair value adjustments on hedged assets 18 (1,025.8) (789.0)
Derivative assets 1,127.6 888.1
Other assets 16.6 15.0
Current taxation asset 48.7 1.7
Deferred taxation asset 3.6 6.3
Property, plant and equipment 44.0 40.9
Intangible assets 17.3 12.0
Intercompany receivables - 0.8
Total assets 28,784.9 27,567.5
--------------------------------------------- ---- ----------- ----------
Liabilities
Amounts owed to credit institutions 19 5,052.3 5,092.9
Amounts owed to retail depositors 20 20,713.7 19,755.8
Intercompany payables 6.5 -
Fair value adjustments on hedged liabilities 18 (39.7) (55.1)
Amounts owed to other customers 114.7 113.1
Debt securities in issue 21 457.5 265.9
Derivative liabilities 88.6 106.6
Lease liabilities 22 10.8 9.9
Other liabilities 23 34.6 38.7
Provisions 24 1.0 0.4
Deferred taxation liability 9.4 22.3
Subordinated liabilities 25 254.5 -
Perpetual Subordinated Bonds 15.2 15.2
26,719.1 25,365.7
Equity
Share capital 4.5 4.5
Retained earnings 1,900.6 2,035.0
Other reserves 160.7 162.3
Shareholders' funds 2,065.8 2,201.8
Total equity and liabilities 28,784.9 27,567.5
--------------------------------------------- ---- ----------- ----------
Notes 1 to 33 form part of these condensed consolidated
financial statements.
The condensed consolidated financial statements on pages 45 to
86 were approved by the Board of Directors on 11 August 2023 and
signed on its behalf by:
Andy Golding April Talintyre
Chief Executive Officer Chief Financial Officer
Company number: 07312896
OneSavings Bank plc
Interim Report for the six months ended 30 June 2023
Condensed Consolidated Statement of Changes in Equity
Additional
Foreign Share-based Tier 1
Share Share Capital exchange FVOCI payment Retained (AT1)
capital premium contribution reserve reserve reserve earnings securities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2023 4.5 - - (1.3) 0.3 13.3 2,035.0 150.0 2,201.8
Profit for the period - - - - - - 59.3 - 59.3
Other comprehensive expense - - - (0.5) (0.4) - - - (0.9)
Tax on items in other comprehensive
expense - - - - 0.1 - - - 0.1
Total comprehensive (expense)/income - - - (0.5) (0.3) - 59.3 - 58.5
Coupon paid on AT1 securities - - - - - - (4.5) - (4.5)
Dividends paid(1) - - - - - - (193.2) - (193.2)
Share-based payments - - - - - (1.1) 4.0 - 2.9
Tax recognised in equity - - - - - 0.3 - - 0.3
At 30 June 2023 (Unaudited) 4.5 - - (1.8) - 12.5 1,900.6 150.0 2,065.8
------------------------------------ -------- -------- ------------- --------- -------- ----------- --------- ----------- -------
At 1 January 2022 4.5 - 1.7 (1.1) 0.6 11.7 1,857.4 150.0 2,024.8
Profit for the period - - - - - - 208.9 - 208.9
Other comprehensive income/(expense) - - - 0.1 (0.7) - - - (0.6)
Tax on items in other comprehensive
expense - - - - 0.1 - - - 0.1
Total comprehensive income/(expense) - - - 0.1 (0.6) - 208.9 - 208.4
Coupon paid on AT 1 securities - - - - - - (4.5) - (4.5)
Dividends paid(1) - - - - - - (139.3) - (139.3)
Share-based payments - - (1.7) - - (1.7) 7.9 - 4.5
Tax recognised in equity - - - - - (0.2) - - (0.2)
At 30 June 2022 (Unaudited) 4.5 - - (1.0) - 9.8 1,930.4 150.0 2,093.7
------------------------------------ -------- -------- ------------- --------- -------- ----------- --------- ----------- -------
1. Dividends paid include the 2022 final dividend of GBP144.1m (2021:
GBP94.8) and an additional GBP49.1m to fund OSBG's share repurchase
programme (2021: GBP44.5).
OneSavings Bank plc
Interim Report for the six months ended 30 June 2023
Condensed Consolidated Statement of Cash Flows
Six months Six months
ended ended
30-Jun-23 30-Jun-22
(Unaudited)
(Unaudited) (Restated)(1)
Note GBPm GBPm
Cash flows from operating activities
Profit before taxation 76.7 268.1
Adjustments for non-cash items 30 156.4 13.1
Changes in operating assets and
liabilities(1) 30 258.1 0.5
Cash generated from operating activities(1) 491.2 281.7
Net tax paid (74.1) (66.5)
Net cash generated from operating
activities 417.1 215.2
Cash flows from investing activities
Maturity and sales of investment securities 322.6 85.5
Purchases of investment securities (348.0) (7.3)
Interest received on investment securities 9.1 2.2
Purchases of property, plant and equipment
and intangible assets (13.3) (3.0)
Cash (used)/generated from investing
activities (29.6) 77.4
Cash flows from financing activities
Financing received(1) 26 591.7 231.7
Financing repaid 26 (461.7) (94.2)
Interest paid on financing 26 (81.7) (9.0)
Coupon paid on AT1 securities (4.5) (4.5)
Dividends paid 9 (193.2) (139.3)
Cash payments on lease liabilities 22 (1.0) (1.1)
Cash used in financing activities (150.4) (16.4)
-------------------------------------------
Net increase in cash and cash
equivalents 237.1 276.2
---- ----------- --------------
Cash and cash equivalents at the beginning
of the period 10 3,044.1 2,736.7
Cash and cash equivalents at the end of
the period 10 3,281.2 3,012.9
Movement in cash and cash equivalents 237.1 276.2
------------------------------------------- ---- ----------- --------------
1. 2022 figures restated see note 1 b) for further details.
OneSavings Bank plc
Interim Report for the six months ended 30 June 2023
Notes to the Condensed Consolidated Financial Statements
1. Accounting policies
1. Basis of preparation
The Group comprises of OneSavings Bank plc (the Company) and its
subsidiaries.
These interim condensed consolidated financial statements have
been prepared in accordance with the Disclosure Guidance and
Transparency Rules (DTR) of the Financial Conduct Authority (FCA)
and in accordance with International Accounting Standard 34 Interim
Financial Reporting as adopted by the UK.
The accounting policies, presentation and methods of computation
are consistent with those applied by the Group in its latest
audited financial statements, which were prepared in accordance
with International Financial Reporting Standards (IFRS) as adopted
by the UK and interpretations issued by the International Financial
Reporting Interpretations Committee (IFRIC). They do not include
all the information required for a complete set of IFRS financial
statements. However, selected explanatory notes are included to
explain events and transactions that are significant to an
understanding of the changes in the Group's financial position and
performance since the last Annual Report and Financial Statements
for the year ended 31 December 2022.
The comparative figures for the year ended 31 December 2022 are
not the Group's statutory accounts for that financial year. The
statutory accounts for the year ended 31 December 2022 have been
delivered to the Registrar of Companies in England and Wales in
accordance with section 447 of the Companies Act 2006. The auditor
has reported on those accounts. Their report was unqualified; did
not include a reference to any matters to which the auditor drew
attention by way of emphasis without qualifying their report, and
did not contain a statement under section 498(2) or (3) of the
Companies Act 2006.
These interim condensed consolidated financial statements were
authorised for issue by the Company's Board of Directors on 10
August 2023.
1. Restatement of Consolidated Cash Flow Statement
In the prior period, cash collateral and margin received on
interest rate swaps of GBP280.8m was included in financing cash
flows in the Condensed Consolidated Statement of Cash Flows. As the
cash flows arise on hedging activities related to items classified
as operating assets and liabilities within the Condensed
Consolidated Statement of Cash Flows, the cash flows should be
included within operating cash flows. In the current period, cash
collateral and margin received on interest rate swaps has been
classified as an operating cash flow and the 2022 Condensed
Consolidated Statement of Cash Flows restated to reclassify a cash
inflow of GBP280.8m from financing activities to operating
activities. This restatement is consistent with that set out on
page 97 of the 2022 Annual Report and Financial Statements.
1. Accounting standards
There were a number of minor amendments to financial reporting
standards that were in issue and effective from 1 January 2023. The
adoption of these amendments has not had a material impact on the
Group.
All other accounting policies applied are consistent with those
set out on pages 97 to 114 of the 2022 Annual Report and Financial
Statements.
1. Accounting policies (continued)
1. Going concern
The Board undertakes regular rigorous assessments of whether the
Group is a going concern in light of current economic conditions
and all available information about future risks and
uncertainties.
In assessing whether the going concern basis is appropriate,
projections for the Group have been prepared, covering its future
performance, capital and liquidity for a period in excess of 12
months from the date of approval of these interim condensed
consolidated financial statements. These forecasts have been
subject to sensitivity tests, including stress scenarios, which
have been compared to the latest economic scenarios provided by the
Group's external economic advisors, as well as reverse stress
tests. The Group has also assessed its ability to meet the interim
Minimum Requirement for own funds and Eligible Liabilities (MREL)
minimum requirements in July 2024.
The assessments included the following:
-- Financial and capital forecasts were prepared under stress scenarios,
which were assessed against economic forecasts provided by the Group's
external economic advisors. Reverse stress tests were also run, to assess
what combinations of House Price Index (HPI), unemployment, default rates
and consumer price index variables would result in the Group utilising
its regulatory capital buffers in full and breaching the Group's minimum
prudential requirements, along with analysis and insight from the Group's
Internal Capital Adequacy Assessment Process (ICAAP). The Board assessed
the likelihood of those reverse stress scenarios occurring within the
next 12 months and concluded that the likelihood is remote.
-- The Group has, through scenario analysis, assessed its ability to meet
the interim MREL minimum requirements through MREL debt issuances and/or
organic capital generation. The Group assessed the uncertainty around the
quantum and phasing of MREL issuance alongside the criteria which must be
met to apply for the 'flexible add-on'. The Board assessed that the Group
expects to meet the interim MREL minimum requirements.
-- The latest liquidity and contingent liquidity positions and forecasts
were assessed against the Internal Liquidity Adequacy Assessment Process
(ILAAP) stress scenarios, with the Group maintaining sufficient liquidity
throughout the going concern assessment period.
-- The Group continues to assess the resilience of its business operating
model and supporting infrastructure in the context of the emerging
economic, business and regulatory environment. The key area of focus
continues to be on the provision of the Group's Important Business
Services, minimising the impact of any service disruptions on the Group's
customers or wider financial service industry. The Group recognises the
need to continually invest in the resilience of its services, with
specific focus in 2023 on ensuring that the third parties on which it
depends have the appropriate levels of resilience and in further
automating those processes that are sensitive to increase in volume.
The Group's financial projections demonstrate that the Group has
sufficient capital and liquidity to continue to meet its regulatory
capital requirements as set out by the Prudential Regulation
Authority (PRA).
The Board has therefore concluded that the Group has sufficient
resources to continue in operational existence for a period in
excess of 12 months from the date of approval of these interim
financial statements and, as a result, it is appropriate to prepare
these interim condensed consolidated financial statements on a
going concern basis.
1. Accounting policies (continued)
1. Segmental reporting
IFRS 8 requires operating segments to be identified on the basis
of internal reports and components of the Group which are regularly
reviewed by the chief operating decision maker to allocate
resources to segments and to assess their performance. For this
purpose, the chief operating decision maker of the Group is the
Board of Directors.
The Group provides loans and asset finance within the UK and the
Channel Islands only. The Group segments its lending business and
operates under two segments:
-- OneSavings Bank (OSB)
-- Charter Court Financial Services (CCFS)
The Group has disclosed relevant risk management tables in note
27 at a sub-segment level to provide detailed analysis of the
Group's core lending business.
1. Judgements in applying accounting policies and critical accounting
estimates
The preparation of the interim condensed consolidated financial
statements requires management to make judgements, estimates and
assumptions that affect the reported income and expense, assets and
liabilities and disclosure of contingencies at the date of the
interim condensed consolidated financial statements. Although these
estimates and assumptions are based on management's best judgement
at that date, actual results may differ from these estimates.
Estimates and assumptions are reviewed on an ongoing basis.
Revisions to estimates are recognised in the period in which the
estimate is revised and in any future periods affected.
In preparing the financial statements, the Group has considered
the impact of climate-related risks on its financial position and
performance, including the impact on expected credit losses (ECL)
and redemption profiles included in effective interest rate (EIR).
While the effects of climate change represent a source of
uncertainty, the Group does not consider there to be a material
impact on its judgements and estimates from the physical or
transition risks in the short term. Accordingly, there is no
significant risk of material adjustment to the carrying amount of
assets and liabilities within the next financial year as a result
of climate change. The Group has recognised a post model adjustment
(PMA) within the ECL provision of GBP6.7m (31 December 2022:
GBP4.4m) in relation to climate change as disclosed in note 16.
The judgements made by the Group in the application of its
accounting policies are consistent with those set out on pages 115
to 118 of the 2022 Annual Report and Financial Statements.
The following estimates may have a significant risk of material
adjustment to the carrying amount of assets within the next
financial period.
(i) Loan book impairments
Set out below are details of the critical accounting estimates
which underpin loan impairment calculations. Less significant
estimates are not discussed as they do not have a material effect.
The Group has recognised total impairments of GBP172.1m (31
December 2022: GBP130.0m) at the reporting date as disclosed in
note 16.
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
Modelled impairment
Modelled provision assessments are subject to estimation
uncertainty, underpinned by a number of estimates being made by
management which are utilised within impairment calculations. Key
areas of estimation within modelled provisioning calculations
include those regarding the loss given default (LGD) model and
forward-looking macroeconomic scenarios.
Loss given default model
The Group has a number of LGD models, which include estimates
regarding propensity to go to possession given default (PPD),
forced sale discount, time to sale and sale costs. The LGD is
sensitive to the application of the HPI, with a 10% haircut seen to
be a reasonable percentage change when reviewing historical and
expected 12 month outcomes. The table below shows the resulting
incremental provision required in a 10% house price haircut being
directly applied to all exposures which not only adjust the sale
discount but the propensity to go to possession:
As at As at
30-Jun-23 31-Dec-22
GBPm GBPm
OSB 40.1 28.0
CCFS 13.3 10.7
Group 53.4 38.7
------ ---------- ----------
Forward-looking macroeconomic scenarios
The Group's macroeconomic scenarios can be found in the Risk
review section on pages 30 to 41. The following tables detail the
ECL scenario sensitivity analysis with each scenario weighted at
100% probability. The purpose of using multiple economic scenarios
is to model the non-linear impact of assumptions surrounding
macroeconomic factors and ECL calculated:
Weighted 100% Severe
As at 30 June 2023 (see note 100% Base 100% Upside 100% Downside downside
(Unaudited) 17) case scenario scenario scenario scenario
Total loans before
provisions, GBPm 24,743.8 24,743.8 24,743.8 24,743.8 24,743.8
Modelled ECL, GBPm 84.6 65.7 49.6 123.3 187.5
Non-modelled ECL,
GBPm 87.5 87.5 87.5 87.5 87.5
Total ECL, GBPm 172.1 153.2 137.1 210.8 275.0
ECL coverage, % 0.70 0.62 0.55 0.85 1.11
------------------- ---------- -------------- ----------- ------------- -----------
As at 31 December 2022
(Audited)
Total loans before
provisions, GBPm 23,728.1 23,728.1 23,728.1 23,728.1 23,728.1
Modelled ECL, GBPm 54.4 41.7 32.8 79.3 120.0
Non-modelled ECL, GBPm 75.6 75.6 75.6 75.6 75.6
Total ECL, GBPm 130.0 117.3 108.4 154.9 195.6
ECL coverage, % 0.55 0.49 0.46 0.65 0.82
----------------------- -------- -------- -------- -------- --------
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
(ii) Loan book acquisition accounting and effective interest
rate
Estimates are made when calculating the EIR for newly-originated
loan assets. Mortgage products offered by the Group include
directly attributable net fee income, early redemption charges and
a period on reversion rates after the fixed/ discount period.
Products revert to the standard variable rate (SVR) or Base rate
plus a margin for the Kent Reliance brand, a SONIA/Base rate plus a
margin for the Precise brand and a LIBOR replacement rate/Base for
the InterBay brand. Subsequent to origination, changes in actual
and expected customer prepayment rates are reflected as increases
or decreases in the carrying value of loan assets with a
corresponding increase or decrease in interest income. The Group
uses observed customer behaviour in its assessment of prepayment
rates; with the choice of curve informed by the expected take up
rate of retention products and the macroeconomic outlook. Customer
prepayments in a fixed rate or incentive period can give rise to
Early Repayment Charge (ERC) income.
Judgement is used in estimating the expected average life of a
mortgage, to determine the quantum and timing of prepayments that
incur ERCs, the period over which net fee income is recognised and
the time customers spend on reversion. Estimates are reviewed
regularly, and over the first half of 2023 the Group observed a
step change in how long Precise customers were spending on the
reversion rate. As BBR has continued to rise, customers have seen
steep increases in the BBR linked reversion rate, and as the Group
has continued to develop its Precise retention programme, customers
are choosing to refinance earlier and spend less time on the higher
reversion rate, compared to previously observed behavioural trends.
This led to an adverse Group statutory adjustment of GBP208.5m
decreasing net interest income and loans and advances to
customers.
A three months' movement in the weighted average time spent in
the reversion period for Precise is considered to be a reasonably
possible change in assumption in the current higher rate
environment and uncertain macroeconomic outlook. The impact of a
-/+ 3 months movement in time spent on reversion by Precise
Mortgages customers is -/+ c.GBP80m.
1. Interest receivable and similar income
Six months Six months
ended ended
30-Jun-23 30-Jun-22
(Unaudited) (Unaudited)
GBPm GBPm
At amortised cost:
On OSB mortgages(1) 353.6 273.7
On CCFS mortgages(2) 113.9 197.2
On finance leases 5.5 4.3
On investment securities 7.4 1.7
On other liquid assets 67.1 9.4
Amortisation of fair value adjustments on
CCFS loan book at Combination (43.6) (27.1)
Amortisation of fair value adjustments on
hedged assets(3) (5.5) (21.9)
498.4 437.3
At fair value through profit or loss (FVTPL):
Net income on derivative financial instruments
- lending activities 194.9 14.9
At FVOCI:
On investment securities 2.5 -
695.8 452.2
----------------------------------------------- ----------- -----------
1.
1. Includes EIR behavioural related reset losses of GBP2.7m (2022:
GBP4.9m gains).
2. Includes EIR behavioural related reset losses of GBP178.0m (2022:
GBP5.3m losses).
3. The amortisation relates to hedged assets where the hedges were
terminated before maturity and were effective at the point of
termination.
1. Interest payable and similar charges
Six months Six months
ended ended
30-Jun-23 30-Jun-22
(Unaudited) (Unaudited)
GBPm GBPm
At amortised cost:
On retail deposits 302.7 86.4
On Bank of England (BoE) borrowings 91.7 15.1
On Perpetual Subordinated Bonds (PSBs) 0.3 0.3
On subordinated liabilities 4.5 0.4
On wholesale borrowings 13.4 0.7
On debt securities in issue 6.1 2.9
On lease liabilities 0.1 0.1
Amortisation of fair value adjustments on
CCFS customer deposits at Combination (0.4) (0.6)
Amortisation of fair value adjustments on
hedged liabilities(1) (0.4) (0.4)
418.0 104.9
At FVTPL:
Net expense on derivative financial instruments
- savings activities 40.3 3.9
458.3 108.8
------------------------------------------------ ----------- -----------
1. The amortisation relates to hedged liabilities where the hedges were
terminated before maturity and were effective at the point of
termination.
5. Fair value (losses)/gains on financial instruments
Six months Six months
ended ended
30-Jun-23 30-Jun-22
(Unaudited) (Unaudited)
GBPm GBPm
Fair value changes in hedged assets (215.1) (346.0)
Hedging of assets 204.1 341.1
Fair value changes in hedged liabilities (18.3) 33.3
Hedging of liabilities 0.3 (32.7)
Ineffective portion of hedges (29.0) (4.3)
Net gains on unmatched swaps 17.1 14.0
Amortisation of inception adjustments(1) (2.4) 6.5
Amortisation of acquisition-related inception
adjustments(2) 5.1 5.3
Amortisation of de-designated hedge relationships(3) - (5.0)
Fair value movements on mortgages at FVTPL 1.2 0.4
Fair value movements on loans and advances
to credit institutions at FVTPL 0.2 -
Debit and credit valuation adjustment (0.3) (0.5)
(8.1) 16.4
---------------------------------------------------- ----------- -----------
1. The amortisation of inception adjustment relates to the amortisation of
the hedging adjustments arising when hedge accounting commences,
primarily on derivative instruments previously taken out against the
mortgage pipeline and also on derivative instruments previously taken out
against new retail deposits.
2. Relates to hedge accounting assets and liabilities recognised on the
Combination. The inception adjustments are being amortised over the life
of the derivative instruments acquired on Combination subsequently
designated in hedging relationships.
3. Relates to the amortisation of hedged items where hedge accounting has
been discontinued due to ineffectiveness.
1. Administrative expenses
Six months Six months
ended ended
30-Jun-23 30-Jun-22
(Unaudited) (Unaudited)
GBPm GBPm
Staff costs 57.5 48.7
Support costs 19.4 14.7
Professional fees 15.3 10.9
Facilities costs 4.0 3.4
Marketing costs 2.5 2.2
Depreciation 3.2 2.5
Amortisation 2.9 4.5
Other costs 5.4 4.4
110.2 91.3
------------------ ----------- -----------
The average number of people employed by the Group (including
Executive Directors) during the period is analysed below:
Six months Six months
ended ended
30-Jun-23 30-Jun-22
(Unaudited) (Unaudited)
UK 1,414 1,231
India 755 595
2,169 1,826
------ ----------- -----------
1. Integration costs
Six months Six months
ended ended
30-Jun-23 30-Jun-22
(Unaudited) (Unaudited)
GBPm GBPm
Consultant fees - 2.3
Staff costs - 1.4
- 3.7
---------------- ----------- -----------
At Combination in October 2019, the Group announced a quantified
financial benefits statement for meaningful cost synergies to be
achieved by the third anniversary of the Combination. Following the
third anniversary in October 2022, the Group ceased recognising
expenses as integration related.
The 2022 consultant fees related to advice on the Group's future
operating structure and staff costs related to personnel who had
left the Group through the transition of operations to the new
operating model.
1. Taxation
The Group publishes its tax strategy on its corporate website.
The table below shows the components of the Group's tax charge for
the period:
Six months Six months
ended ended
30-Jun-23 30-Jun-22
(Unaudited) (Unaudited)
GBPm GBPm
Corporation tax - current period 27.8 70.9
Corporation tax - prior period (0.2) (0.4)
Deferred tax - current period 1.1 (0.6)
Release of deferred tax on CCFS Combination(1) (11.3) (10.7)
Total tax 17.4 59.2
------------------------------------------------ ----------- -----------
1. Release of deferred tax on CCFS Combination relates to the unwind of the
deferred tax asset recognised on the fair value adjustments of the CCFS
assets and liabilities at the acquisition date GBP(11.3)m (2022:
GBP(6.0)m and the impact of the bank surcharge reduction on these
deferred tax liabilities of GBP(4.7)m).
The charge for taxation on the Group's profit before taxation
differs from the charge based on the standard rate of UK
Corporation Tax of 23.5% (2022: 19%) as follows:
Six months Six months
ended ended
30-Jun-23 30-Jun-22
(Unaudited) (Unaudited)
GBPm GBPm
Profit before tax 76.7 268.1
------------------------------------------- ----------- -----------
Profit multiplied by the standard rate
of UK Corporation Tax 23.5% (2022: 19%) 18.0 51.0
Bank surcharge(1) (0.2) 15.9
Taxation effects of:
Expenses not deductible for tax purposes 1.1 -
Impact of deferred tax rate change(2) - (4.7)
Adjustments in respect of earlier periods (0.2) (0.4)
Income not taxable (0.1) (1.8)
Tax adjustments in respect of share-based
payments - 0.8
Impact of tax losses carried forward (0.2) (0.1)
Tax on coupon paid on AT1 securities (1.2) (1.2)
Timing differences on capital items 0.2 (0.4)
Other - 0.1
Total tax 17.4 59.2
------------------------------------------- ----------- -----------
1. Tax charge for the two banking entities of GBP1.5m (2022: GBP17.7m)
offset by the tax impact of unwinding CCFS Combination items of GBP1.7m
(2022: GBP1.8m).
2. Due to change in bank surcharge rate from 8% to 3% effective from 1 April
2023.
1. Taxation (continued)
Factors affecting tax charge for the period
On 1 April 2023, the corporation tax rate increased from 19% to
25%, and the Bank Surcharge rate reduced from 8% to 3%, with an
increase in the Bank Surcharge Allowance from GBP25m to GBP100m.
Therefore, for the year ending 31 December 2023 the blended
corporation tax rate 23.5%, the Bank Surcharge rate 4.25% and the
surcharge allowance is GBP81.3m.
1. Dividends
Dividends paid during the period are detailed below:
Six months Six months
ended ended
30-Jun-23 30-Jun-22
(Unaudited) (Unaudited)
GBPm GBPm
Final dividend for the prior year 93.8 94.8
Special dividend for the prior year 50.3 -
Dividends paid to fund OSBG's share
repurchase programme 49.1 44.5
Total dividend paid 193.2 139.3
------------------------------------ ----------- -----------
Dividends to fund OSBG's share repurchase programme include
GBP40.8m (2022: GBP41.5m) for shares repurchased to 30 June 2023
and GBP8.3m (2022: GBP3.0m) of advanced funding for upcoming share
repurchase activity.
1. Cash and cash equivalents
The following table analyses the cash and cash equivalents
disclosed in the Condensed Consolidated Statement of Cash
Flows:
As at As at As at As at
30-Jun-23 31-Dec-22 30-Jun-22 31-Dec-21
(Unaudited) (Audited) (Unaudited) (Audited)
GBPm GBPm GBPm GBPm
Cash in hand 0.4 0.4 0.4 0.5
Unencumbered loans and advances
to credit institutions 3,280.8 2,953.7 2,962.7 2,636.2
Investment securities - 90.0 49.8 100.0
3,281.2 3,044.1 3,012.9 2,736.7
-------------------------------- ----------- ---------- ----------- ----------
1. Loans and advances to credit institutions
As at As at
30-Jun-23 31-Dec-22
(Unaudited) (Audited)
GBPm GBPm
Unencumbered:
BoE call account 3,040.5 2,806.5
Call accounts 98.4 73.2
Cash held in special purpose vehicles (SPVs)(1) 126.1 63.8
Term deposits 15.8 10.2
Encumbered:
BoE cash ratio deposit 68.9 62.8
Cash held in SPVs(1) 63.8 111.8
Cash margin given 203.5 237.4
3,617.0 3,365.7
------------------------------------------------ ----------- ----------
1. Cash held in SPVs is ring-fenced for use in managing the Group's
securitised debt facilities under the terms of securitisation agreements.
Cash held in internal SPVs is treated as unencumbered in proportion to
the retained interest in the SPVs based on the nominal value of the bonds
held in the Group to total bonds in the securitisation, and included in
cash and cash equivalents. Cash retained in SPVs designated as cash
reserve credit enhancement is treated as encumbered in proportion to the
external holdings in the SPVs and excluded from cash and cash
equivalents.
12. Investment securities
As at As at
30-Jun-23 31-Dec-22
(Unaudited) (Audited)
GBPm GBPm
Held at amortised cost:
Residential Mortgage-Backed Securities (RMBS)
loan notes 338.5 262.6
Held at FVOCI:
UK Sovereign debt 9.8 149.8
Held at FVTPL:
RMBS loan notes 0.4 0.5
348.7 412.9
The credit risk on investment securities held at amortised cost
has not significantly increased since initial recognition and they
are categorised as stage 1. The ECLs are less than GBP0.1m (2022:
less than GBP0.1m).
1. Investment securities (continued)
Movements during the period in investment securities held by the
Group are analysed below:
Six months
ended Year ended
30-Jun-23 31-Dec-22
(Unaudited) (Audited)
GBPm GBPm
At 1 January 412.9 491.4
Additions(1) 348.0 686.5
Disposals and maturities(2) (412.6) (764.4)
Movement in accrued interest 0.8 (0.9)
Changes in fair value (0.4) 0.3
348.7 412.9
----------------------------- ----------- ----------
1. There are no (2022: GBP90.0m) additions of UK Treasury bills which had a
maturity of less than three months from date of acquisition.
2. Disposals and maturities includes GBP90.0m (2022: GBP100.0m) of UK
Treasury bills which had a maturity of less than three months from date
of acquisition.
13. Loans and advances to customers
As at As at
30-Jun-23 31-Dec-22
(Unaudited) (Audited)
GBPm GBPm
Held at amortised cost:
Loans and advances (see note 14) 24,541.2 23,564.9
Finance leases (see note 15) 202.6 163.2
24,743.8 23,728.1
Less: Expected credit losses (see note 16) (172.1) (130.0)
24,571.7 23,598.1
Held at FVTPL:
Residential mortgages 15.1 14.6
24,586.8 23,612.7
1. Loans and advances
As at 30-Jun-23 (Unaudited) As at 31-Dec-22 (Audited)
OSB CCFS Total OSB CCFS Total
Held at amortised
cost GBPm GBPm GBPm GBPm GBPm GBPm
Gross carrying
amount
Stage 1 10,525.8 8,189.2 18,715.0 10,188.4 8,375.5 18,563.9
Stage 2 2,780.4 2,391.5 5,171.9 2,508.9 1,907.4 4,416.3
Stage 3 404.4 173.8 578.2 345.7 156.0 501.7
Stage 3 (POCI)(1) 35.6 40.5 76.1 38.5 44.5 83.0
13,746.2 10,795.0 24,541.2 13,081.5 10,483.4 23,564.9
-------- --------
1. Purchased or originated credit impaired
1. Loans and advances (continued)
The tables below show the movement in loans and advances to
customers by IFRS 9 stage during the period:
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2022 18,078.9 2,412.1 459.5 97.4 21,047.9
Originations(1) 5,829.6 - - - 5,829.6
Repayments and
write-offs(2) (2,855.3) (353.6) (89.3) (14.4) (3,312.6)
Transfers:
- To Stage 1 1,121.6 (1,098.0) (23.6) - -
- To Stage 2(3) (3,524.0) 3,574.6 (50.6) - -
- To Stage 3 (86.9) (118.8) 205.7 - -
At 31 December 2022
(Audited) 18,563.9 4,416.3 501.7 83.0 23,564.9
Originations(1) 2,320.5 - - - 2,320.5
Acquisitions(4) 91.0 - - - 91.0
Repayments and
write-offs(2) (1,119.7) (257.4) (51.2) (6.9) (1,435.2)
Transfers:
- To Stage 1 1,074.0 (1,061.6) (12.4) - -
- To Stage 2(3) (2,164.3) 2,194.6 (30.3) - -
- To Stage 3 (50.4) (120.0) 170.4 - -
At 30 June 2023 (Unaudited) 18,715.0 5,171.9 578.2 76.1 24,541.2
--------- --------- ------- -------
1. Originations include further advances and drawdowns on existing
commitments.
2. Repayments and write-offs include customer redemptions and write-offs
which are immaterial.
3. For further detail relating to movements by stage see the Risk review
section on pages 30 to 41.
4. During the period, the Group repurchased GBP91.0m of own originated UK
residential and buy to let mortgages from deconsolidated SPVs at par.
The contractual amount outstanding on loans and advances that
were written off during the reporting period and are still subject
to collections and recovery activity is GBP0.3m (2022:
GBP0.8m).
Loans and advances of GBP128.0m (2022: GBP110.0m) are in a
probation period before they can move out of Stage 3.
1. Finance leases
The Group provides asset finance lending through InterBay Asset
Finance Limited.
As at As at
30-Jun-23 31-Dec-22
(Unaudited) (Audited)
GBPm GBPm
Gross investment in finance leases, receivable
Less than one year 77.8 60.7
Between one and two years 59.6 49.5
Between two and three years 45.3 36.0
Between three and four years 28.9 23.4
Between four and five years 12.3 9.9
More than five years 2.4 1.3
226.3 180.8
Unearned finance income (23.7) (17.6)
Net investment in finance leases 202.6 163.2
----------------------------------------------- ----------- ----------
Net investment in finance leases, receivable
Less than one year 67.3 52.4
Between one and two years 52.6 44.4
Between two and three years 41.3 33.2
Between three and four years 27.3 22.3
Between four and five years 11.8 9.6
More than five years 2.3 1.3
202.6 163.2
-----------
The Group has recognised GBP5.0m (2022: GBP4.8m) of ECLs on
finance leases as at 30 June 2023.
1. Expected credit losses
The ECL has been calculated based on various scenarios as set
out below:
As at 30-Jun-23 (Unaudited) As at 31-Dec-22 (Audited)
ECL Weighted ECL Weighted
provision Weighting ECL provision provision Weighting ECL provision
GBPm % GBPm GBPm % GBPm
Scenarios
Upside 49.6 30 14.9 32.8 30 9.8
Base case 65.7 40 26.3 41.7 40 16.7
Downside scenario 123.3 20 24.7 79.3 20 15.9
Severe downside
scenario 187.5 10 18.7 120.0 10 12.0
Total weighted
provisions 84.6 54.4
Non-modelled
provisions:
Individually assessed
provisions 53.2 45.8
Post model adjustments 34.3 29.8
Total provision 172.1 130.0
---------------------- --------- --------- -------------- --------- --------- --------------
The Group continued to recognise the increases in credit risk
due to the cost of living and cost of borrowing stresses caused by
high inflation and increases in interest rates. As a result, the
Group held GBP16.2m (2022: GBP16.0m) of ECL in PMA for risks not
sufficiently accounted for in the IFRS 9 framework, GBP4.2m (2022:
GBP7.3m) for cost of living and GBP12.0m (2022: GBP8.7m) for cost
of borrowing. The approach to identify the PMA for the cost of
living is an increase in probability of default (PD) through
analysing the effect of the increases in living costs, such as
household bills and groceries, on affordability, which is used to
increase the default risk to all customers, with those on lower
income more impacted. The cost of living PMA has reduced since 31
December 2022, reflecting the inflation peak has been observed and
forecasts are for decreases in inflation. The cost of borrowing PMA
specifically identified those that are more at risk of default due
to reverting onto variable rate in the near future, causing a
payment increase and higher affordability risk, which is used both
to apply an additional significant increase in credit risk (SICR)
and stage 2 criteria and in some cases a higher default risk.
The Group continued to observe an extended time to sale, which
was in excess of modelled expectations and observations prior to
the pandemic which accounted forGBP7.6m (2022: GBP8.7m) as a PMA.
Whilst the Group expects the process delays to reduce in time, a
PMA was held to reflect an extended time to sale in line with most
recent observations for those in default.
As part of the Group's recognition of climate risk and overall
Environmental, Social and Governance (ESG) agenda, the Group
considers that properties with lower energy efficiency are likely
to require investment to reach minimum energy efficiency standards
in the future. As a result, to reflect the expected transition risk
and physical risks of climate change, the Group held GBP6.7m (2022:
GBP4.4m) of PMA.
To reflect the ongoing cladding concerns, the Group identified a
valuation risk to a small number of properties and accounted for a
further sale discount for these properties by a PMA of GBP0.9m
(2022: GBP0.7m).
An Asset Finance PMA of GBP0.4m (2022: nil) was raised to offset
the adjustment of scenarios back to symmetrical weightings, as
ongoing concerns remain within the economy driven by inflationary
pressures.
In addition to the above PMAs, the Group has identified accounts
within the OSB second charge portfolio whereby the arrears balances
(contractual missed payments), fees and other charges should/will
be written off. An ECL of GBP2.5m (2022: nil) has been recognised
for the expected losses that will manifest over the next six
months.
1. Expected credit losses (continued)
The Group's ECL by segment and IFRS 9 stage is shown below:
As at 30-Jun-23 (Unaudited) As at 31-Dec-22 (Audited)
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 15.8 2.9 18.7 5.9 1.3 7.2
Stage 2 49.1 17.6 66.7 35.3 15.6 50.9
Stage 3 73.0 10.3 83.3 60.5 7.8 68.3
Stage 3 (POCI) 1.7 1.7 3.4 1.5 2.1 3.6
139.6 32.5 172.1 103.2 26.8 130.0
-------------- ---------- -------- --------- --------- -------- --------
The tables below show the movement in the ECL by IFRS 9 stage
during the period. ECLs on originations and acquisitions reflect
the IFRS 9 stage of loans originated or acquired during the period
as at 30 June 2023 and not the date of origination. Re-measurement
of loss allowance relates to existing loans which did not redeem
during the period and includes the impact of loans moving between
IFRS 9 stages.
Stage Stage Stage Stage
1 2 3 3 (POCI) Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2022 12.1 25.0 60.4 4.0 101.5
Originations 6.9 - - - 6.9
Repayments and write-offs (1.3) (3.0) (6.9) (0.3) (11.5)
Re-measurement of loss allowance (15.1) 26.4 17.5 (0.7) 28.1
Transfers:
- To Stage 1 10.0 (9.2) (0.8) - -
- To Stage 2 (2.0) 3.9 (1.9) - -
- To Stage 3 (0.1) (2.1) 2.2 - -
Changes in assumptions and
model parameters (3.3) 9.9 (2.2) 0.6 5.0
At 31 December 2022 (Audited) 7.2 50.9 68.3 3.6 130.0
Originations 4.4 - - - 4.4
Acquisitions 0.6 0.1 - - 0.7
Repayments and write-offs (0.4) (2.0) (7.6) (0.2) (10.2)
Re-measurement of loss allowance (5.6) 29.8 21.2 - 45.4
Transfers:
- To Stage 1 11.0 (10.6) (0.4) - -
- To Stage 2 (0.8) 1.7 (0.9) - -
- To Stage 3 - (3.5) 3.5 - -
Changes in assumptions and
model parameters 2.3 0.3 (0.8) - 1.8
At 30 June 2023 (Unaudited) 18.7 66.7 83.3 3.4 172.1
--------------------------------- ------ ------ ----- --------- ------
1. Expected credit losses (continued)
The table below shows the stage 2 ECL balances by transfer
criteria:
As at 30-Jun-23 (Unaudited) As at 31-Dec-22 (Audited)
Carrying Carrying
value ECL Coverage value ECL Coverage
GBPm GBPm % GBPm GBPm %
Criteria:
Relative PD
movement 3,486.8 54.7 1.57 3,090.2 42.9 1.39
Qualitative
measures 1,647.4 11.5 0.70 1,277.6 7.5 0.59
30 days past
due backstop 41.7 0.5 1.20 49.3 0.5 1.01
Total 5,175.9 66.7 1.29 4,417.1 50.9 1.15
-------------- ----------- ------ ---------- ---------- ----- ----------
The Group has a number of qualitative measures to determine
whether an SICR has taken place. These triggers utilise both
internal performance information, to analyse whether an account is
in distress but not yet in arrears, and external credit bureau
information, to determine whether the customer is experiencing
financial difficulty with an external credit obligation.
1. Impairment of financial assets
The charge for impairment of financial assets in the Condensed
Consolidated Statement of Comprehensive Income comprises:
Six months Six months
ended ended
30-Jun-23 30-Jun-22
(Unaudited) (Unaudited)
GBPm GBPm
Write-offs in period 3.8 0.9
Increase in ECL provision 40.8 0.7
44.6 1.6
-------------------------- ----------- -----------
1. Hedge accounting
As at As at
30-Jun-23 31-Dec-22
(Unaudited) (Audited)
GBPm GBPm
Hedged assets
Current hedge relationships (1,043.5) (827.9)
Swap inception adjustment 45.0 44.1
Cancelled hedge relationships (27.3) (5.2)
Fair value adjustments on hedged assets (1,025.8) (789.0)
--------------------------------------------- ----------- ----------
Hedged liabilities
Current hedge relationships 43.8 58.0
Swap inception adjustment (4.0) (2.3)
Cancelled hedge relationships (0.1) (0.6)
Fair value adjustments on hedged liabilities 39.7 55.1
--------------------------------------------- ----------- ----------
The swap inception adjustment relates to hedge accounting
adjustments arising when hedge accounting commences, primarily on
derivative instruments previously taken out against the mortgage
pipeline and on derivative instruments previously taken out against
new retail deposits.
1. Hedge accounting (continued)
De-designated hedge relationships relate to hedge accounting
adjustments on failed hedge accounting relationships. These
adjustments are amortised over the remaining lives of the original
hedged items.
Cancelled hedge relationships predominantly represent the
unamortised fair value adjustment for interest rate risk hedges
that have been cancelled and replaced due to IBOR transition,
securitisation activities and legacy long-term fixed rate mortgages
(c. 25 years at origination).
1. Amounts owed to credit institutions
As at As at
30-Jun-23 31-Dec-22
(Unaudited) (Audited)
GBPm GBPm
BoE Term Funding Scheme for SMEs (TFSME) 4,248.5 4,232.0
BoE Indexed Long-Term Repo (ILTR) - 300.9
Commercial repo 0.2 10.2
Loans from credit institutions - 0.1
4,248.7 4,543.2
Cash collateral and margin received 803.6 549.7
5,052.3 5,092.9
----------------------------------------- ----------- ----------
1. Amounts owed to retail depositors
As at 30-Jun-23 (Unaudited) As at 31-Dec-22 (Audited)
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Fixed rate
deposits 8,292.5 6,483.4 14,775.9 8,085.9 5,899.6 13,985.5
Variable rate
deposits 3,251.5 2,686.3 5,937.8 3,046.3 2,724.0 5,770.3
11,544.0 9,169.7 20,713.7 11,132.2 8,623.6 19,755.8
-------------- ---------- -------- --------- --------- -------- --------
1. Debt securities in issue
As at As at
30-Jun-23 31-Dec-22
(Unaudited) (Audited)
GBPm GBPm
Asset backed loan notes at amortised cost 457.5 265.9
Amount due for settlement within 12 months 126.2 -
Amount due for settlement after 12 months 331.3 265.9
457.5 265.9
------------------------------------------- ----------- ----------
The asset-backed loan notes are secured on fixed and variable
rate mortgages and are redeemable in part from time to time, but
such redemptions are limited to the net principal received from
customers in respect of underlying mortgage assets. The maturity
date of the funds matches the contractual maturity date of the
underlying mortgage assets. The Group expects that a large
proportion of the underlying mortgage assets, and therefore these
notes, will be repaid within five years.
1. Debt securities in issue (continued)
Asset-backed loan notes may all be repurchased by the Group at
any interest payment date on or after the call dates, or at any
interest payment date when the current balance of the mortgages
outstanding is less than or equal to 10% of the principal amount
outstanding on the loan notes on the date they were issued.
Interest is payable at fixed margins above SONIA.
As at 30 June 2023, notes were in issue through the following
funding vehicles:
As at As at
30-Jun-23 31-Dec-22
(Unaudited) (Audited)
GBPm GBPm
CMF 2020-1 plc 126.2 141.8
Canterbury Finance No.3 plc - 21.0
Canterbury Finance No.4 plc 31.4 103.1
CMF 2023-1 PLC 299.9 -
457.5 265.9
---------------------------- ----------- ----------
1. Lease liabilities
As at As at
30-Jun-23 31-Dec-22
(Unaudited) (Audited)
GBPm GBPm
At 1 January 9.9 10.7
New leases 1.8 0.9
Lease repayments (1.0) (1.9)
Interest accruals 0.1 0.2
10.8 9.9
------------------ ----------- ----------
1. Other liabilities
As at As at
30-Jun-23 31-Dec-22
(Unaudited) (Audited)
GBPm GBPm
Falling due within one year:
Accruals 22.1 28.0
Deferred income 0.5 0.6
Other creditors 12.0 10.1
34.6 38.7
----------------------------- ----------- ----------
1. Provisions and contingent liabilities
The Group has reviewed its current exposure to Payment
Protection Insurance (PPI) claims, following the FCA deadline for
PPI claims on 29 August 2019 and has reduced its provision to less
than GBP0.1m (2022: less than GBP0.1m).
The Group released its GBP1.5m provision for conduct related
exposures in 2022 following completion of an internal review.
An analysis of the Group's Financial Services Compensation
Scheme (FSCS) and other provisions is presented below:
Other regulatory ECL on undrawn
FSCS provisions loan facilities Total
GBPm GBPm GBPm GBPm
At 1 January 2022 0.1 1.5 0.4 2.0
Profit or loss credit (0.1) (1.5) - (1.6)
At 31 December 2022
(Audited) - - 0.4 0.4
Profit or loss charge - - 0.6 0.6
At 30 June 2023 (Unaudited) - - 1.0 1.0
---------------------------- ----- ---------------- ---------------- -----
In January 2020, the Group was contacted by the FCA in
connection with a multi-firm thematic review into forbearance
measures adopted by lenders in respect of a portion of the mortgage
market. The Group has responded to information requests from the
FCA. In addition, the Group is reviewing its collections processes
and how mortgage customers in arrears are managed. This includes a
retrospective review of the Group's application of forbearance
measures and associated outcomes for certain cohorts of customers.
It is not possible to reliably predict or estimate the outcome of
these reviews and therefore their financial effect, if any, on the
Group.
1. Subordinated liabilities
The Group's outstanding subordinated liabilities are summarised
below:
As at As at
30-Jun-23 31-Dec-22
(Unaudited) (Audited)
GBPm GBPm
Fixed rate:
Subordinated liabilities 2033
(9.993%) 254.5 -
All subordinated liabilities are denominated in Pounds Sterling
and are unlisted.
The subordinated debt liabilities are structured with identical
principal terms to the OSB GROUP PLC external Tier 2 debt issuance
and are as follows:
-- Interest: Interest on the notes is fixed at an initial rate until the
reset date (27 July 2028). If the notes are not redeemed prior to the
reset date, the interest rate will be reset and fixed based on a new
floating benchmark gilt rate plus a spread of 6.296%.
-- Redemption: The Issuer may redeem the Tier 2 notes in whole (but not in
part) in its sole discretion on any day from (and including) 27 April
2028 to (and including) 27 July 2028 (the reset date) as specified in the
terms of the agreement. Optional redemption may also take place for
certain regulatory or tax reasons. Any optional redemption requires the
prior consent of the PRA.
1. Subordinated liabilities (continued)
-- Ranking: The notes constitute direct, unsecured and subordinated
obligations of the Group and rank at least pari passu, without any
preference, among themselves as Tier 2 capital. The notes rank behind the
claims of depositors and other unsecured and unsubordinated creditors,
but rank in priority to holders of Tier 1 capital and of equity of the
Group.
Movements during the period in subordinated liabilities are
analysed below:
Six months
ended Year ended
30-Jun-23 31-Dec-22
(Unaudited) (Audited)
GBPm GBPm
At 1 January - 10.3
Addition 250.0 -
Movement in accrued interest 4.5 -
Repayment of debt - (10.3)
254.5 -
----------------------------- ----------- ----------
1. Reconciliation of cash flows for financing activities
The tables below show a reconciliation of the Group's
liabilities classified as financing activities within the Condensed
Consolidated Statement of Cash Flows:
Amounts owed
to credit Debt securities Subordinated
institutions in issue liabilities
(see note (see note (see note
19) 21) 25) PSBs Total
GBPm GBPm GBPm GBPm GBPm
At 1 January
2023 4,543.2 265.9 - 15.2 4,824.3
Cash movements:
Principal
drawdowns 43.1 298.6 250.0 - 591.7
Principal
repayments (353.4) (108.3) - - (461.7)
Interest paid (76.6) (4.8) - (0.3) (81.7)
Non-cash
movements:
Interest charged 92.4 6.1 4.5 0.3 103.3
At 30 June 2023
(Unaudited) 4,248.7 457.5 254.5 15.2 4,975.9
---------------- ------------- --------------- ------------ ----- -------
1. Reconciliation of cash flows for financing activities (continued)
Amounts owed
to credit Debt securities Subordinated
institutions in issue liabilities
(see note (see note (see note
19) 21) 25) PSBs Total
Restated(1)
GBPm GBPm GBPm GBPm GBPm
At 1 January
2022(1) 4,204.2 460.3 10.3 15.2 4,690.0
Cash movements:
Principal
drawdowns(1) 231.7 - - - 231.7
Principal
repayments (1.2) (93.0) - - (94.2)
Interest paid (5.4) (2.9) (0.4) (0.3) (9.0)
Non-cash movements:
Interest charged 15.1 2.9 0.4 0.3 18.7
At 30 June 2022(1)
(Unaudited) 4,444.4 367.3 10.3 15.2 4,837.2
------------------- ------------- --------------- ------------ ----- -------
1. 2022 figures restated see note 1 b) for further details.
27. Risk Management
The tables below are a summary of the Group's risk management
and financial instruments disclosures, of which a complete
disclosure for the year ended 31 December 2022 is included in the
2022 Annual Report and Financial Statements. The tables do not
represent all risks the Group is exposed to and should be read in
conjunction with the Risk review on pages 30 to 41.
Credit risk
The following tables show the Group's maximum exposure to credit
risk and the impact of collateral held as security, capped at the
gross exposure amount, by impairment stage. Capped collateral
excludes the impact of forced sale discounts and costs to sell.
As at 30-Jun-23 (Unaudited)
OSB CCFS Total
--------------------------- ---------------------------
Capped Capped Capped
Gross carrying collateral Gross carrying collateral Gross carrying collateral
amount held amount held amount held
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 10,720.5 10,683.7 8,189.2 8,188.1 18,909.7 18,871.8
Stage 2 2,784.4 2,781.9 2,391.5 2,391.2 5,175.9 5,173.1
Stage 3 408.3 376.5 173.8 173.8 582.1 550.3
Stage 3
(POCI) 35.6 34.6 40.5 40.4 76.1 75.0
13,948.8 13,876.7 10,795.0 10,793.5 24,743.8 24,670.2
------- -------------- ----------- -------------- ----------- -------------- -----------
1. Risk management (continued)
As at 31-Dec-22 (Audited)
OSB CCFS Total
--------------------------- ---------------------------
Capped Capped Capped
Gross carrying collateral Gross carrying collateral Gross carrying collateral
amount held amount held amount held
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 10,346.8 10,320.4 8,375.5 8,374.4 18,722.3 18,694.8
Stage 2 2,509.7 2,508.5 1,907.4 1,907.1 4,417.1 4,415.6
Stage 3 349.7 319.2 156.0 156.0 505.7 475.2
Stage 3
(POCI) 38.5 37.5 44.5 44.4 83.0 81.9
13,244.7 13,185.6 10,483.4 10,481.9 23,728.1 23,667.5
------- -------------- ----------- -------------- ----------- -------------- -----------
The Group's main form of collateral held is property, based in
the UK and the Channel Islands.
The Group uses indexed loan to value (LTV) ratios to assess the
quality of the uncapped collateral held. Property values are
updated to reflect changes in the HPI. A breakdown of loans and
advances to customers by indexed LTV is as follows:
As at 30-Jun-23 (Unaudited) As at 31-Dec-22 (Audited)
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 2,475.5 1,006.7 3,482.2 14 2,768.8 914.7 3,683.5 16
50% - 60% 2,284.4 1,409.9 3,694.3 15 2,770.7 1,361.1 4,131.8 17
60% - 70% 4,476.7 3,555.0 8,031.7 33 4,647.5 3,561.7 8,209.2 35
70% - 80% 3,324.8 4,394.6 7,719.4 31 2,150.7 4,277.3 6,428.0 26
80% - 90% 872.9 422.0 1,294.9 5 548.3 365.5 913.8 4
90% - 100% 247.8 4.7 252.5 1 181.3 2.5 183.8 1
>100% 266.7 2.1 268.8 1 177.4 0.6 178.0 1
Total loans before
provisions 13,948.8 10,795.0 24,743.8 100 13,244.7 10,483.4 23,728.1 100
------------------ -------- -------- -------- --- -------- -------- -------- ---
The table below shows the LTV banding for the OSB segments' two
major lending streams:
As at 30-Jun-23 (Unaudited) As at 31-Dec-22 (Audited)
BTL/SME Residential Total BTL/SME Residential Total
OSB GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 1,078.5 1,397.0 2,475.5 18 1,301.4 1,467.4 2,768.8 21
50% - 60% 2,026.0 258.4 2,284.4 16 2,497.2 273.5 2,770.7 21
60% - 70% 4,219.9 256.8 4,476.7 32 4,386.0 261.5 4,647.5 36
70% - 80% 3,128.9 195.9 3,324.8 24 1,977.1 173.6 2,150.7 16
80% - 90% 688.4 184.5 872.9 6 418.1 130.2 548.3 4
90% - 100% 203.2 44.6 247.8 2 167.3 14.0 181.3 1
>100% 261.8 4.9 266.7 2 172.9 4.5 177.4 1
Total loans
before provisions 11,606.7 2,342.1 13,948.8 100 10,920.0 2,324.7 13,244.7 100
------------------ -------- ----------- -------- --- -------- ----------- -------- ---
1. Risk management (continued)
The tables below show the LTV analysis of the OSB BTL/SME
sub-segment:
As at 30-Jun-23 (Unaudited)
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 946.0 91.1 16.5 24.9 1,078.5
50% - 60% 1,891.0 90.9 41.0 3.1 2,026.0
60% - 70% 3,894.7 145.8 179.0 0.4 4,219.9
70% - 80% 2,848.8 280.1 - - 3,128.9
80% - 90% 443.2 245.2 - - 688.4
90% - 100% 69.7 79.8 - 53.7 203.2
>100% 194.3 63.5 1.0 3.0 261.8
Total loans before
provisions 10,287.7 996.4 237.5 85.1 11,606.7
--------------------- ---------- ---------- ------------ ------- --------
As at 31-Dec-22 (Audited)
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 1,137.6 114.7 16.1 33.0 1,301.4
50% - 60% 2,324.1 112.8 57.2 3.1 2,497.2
60% - 70% 4,111.4 164.4 110.2 - 4,386.0
70% - 80% 1,741.5 235.6 - - 1,977.1
80% - 90% 232.8 151.6 - 33.7 418.1
90% - 100% 77.1 63.8 - 26.4 167.3
>100% 130.5 38.4 1.0 3.0 172.9
Total loans before
provisions 9,755.0 881.3 184.5 99.2 10,920.0
--------------------- ---------- ---------- ------------ ------- --------
The tables below show the LTV analysis of the OSB Residential
sub-segment:
As at 30-Jun-23 (Unaudited) As at 31-Dec-22 (Audited)
First Second First Second
charge charge Total charge charge Total
OSB GBPm GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 1,305.9 91.1 1,397.0 1,357.6 109.8 1,467.4
50% - 60% 224.2 34.2 258.4 238.1 35.4 273.5
60% - 70% 239.4 17.4 256.8 242.9 18.6 261.5
70% - 80% 189.6 6.3 195.9 168.3 5.3 173.6
80% - 90% 182.8 1.7 184.5 128.8 1.4 130.2
90% - 100% 43.7 0.9 44.6 13.4 0.6 14.0
>100% 4.1 0.8 4.9 3.8 0.7 4.5
Total loans
before
provisions 2,189.7 152.4 2,342.1 2,152.9 171.8 2,324.7
-------------- --------- --------- --------- --------- -------- --------
1. Risk management (continued)
The table below shows the LTV analysis of the four CCFS
sub-segments:
As at 30-Jun-23 (Unaudited)
Second
charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 330.1 517.0 120.4 39.2 1,006.7 9
50% - 60% 829.7 498.7 56.9 24.6 1,409.9 13
60% - 70% 2,581.3 897.1 55.8 20.8 3,555.0 33
70% - 80% 3,708.4 645.1 28.7 12.4 4,394.6 41
80% - 90% 208.7 209.7 1.5 2.1 422.0 4
90% - 100% 1.6 1.6 1.5 - 4.7 -
>100% - 0.1 2.0 - 2.1 -
Total loans before
provisions 7,659.8 2,769.3 266.8 99.1 10,795.0 100
------------------ ---------- ----------- -------- -------- -------- ---
As at 31-Dec-22 (Audited)
Second
charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 308.6 498.3 62.9 44.9 914.7 9
50% - 60% 799.5 501.8 29.9 29.9 1,361.1 13
60% - 70% 2,587.6 924.2 25.6 24.3 3,561.7 34
70% - 80% 3,613.8 622.9 26.9 13.7 4,277.3 41
80% - 90% 215.1 146.8 2.4 1.2 365.5 3
90% - 100% 0.2 0.8 1.5 - 2.5 -
>100% - 0.1 0.5 - 0.6 -
Total loans before
provisions 7,524.8 2,694.9 149.7 114.0 10,483.4 100
------------------ ---------- ----------- -------- -------- -------- ---
1. Risk management (continued)
Forbearance measures undertaken
The Group has a range of options available where borrowers
experience financial difficulties that impact their ability to
service their financial commitments under the loan agreement. These
options are explained in the Principal Risks and Uncertainties
section of the Risk Review on pages 30 to 60 of the 2022 Annual
Report and Financial Statements.
A summary of the forbearance measures undertaken during the
period is shown below. The balances disclosed reflect the period
end balance of the accounts where a forbearance measure was
undertaken during the period.
Six months ended Year ended
30-Jun-23 31-Dec-22
(Unaudited) (Audited)
Number of Number of
Forbearance type accounts GBPm accounts GBPm
Interest-only switch 44 6.2 70 12.2
Interest rate reduction 114 15.0 91 7.5
Term extension 65 9.1 53 2.9
Payment deferral 198 35.6 194 34.0
Voluntary-assisted sale - - 5 1.2
Payment concession (reduced monthly
payments) 61 14.8 55 12.0
Capitalisation of interest 9 0.6 27 9.0
Full or partial debt forgiveness 76 2.5 359 9.6
Total 567 83.8 854 88.4
------------------------------------ ------------ ---- --------- ----
Loan type
First charge owner-occupier 257 29.6 217 27.8
Second charge owner-occupier 131 2.8 460 8.9
Buy-to-Let 117 34.0 107 37.1
Commercial 62 17.4 70 14.6
Total 567 83.8 854 88.4
------------------------------------ ------------ ---- --------- ----
1. Risk management (continued)
Geographical analysis by region
An analysis of loans, excluding asset finance leases, by region
is provided below:
As at 30-Jun-23 (Unaudited) As at 31-Dec-22 (Audited)
OSB CCFS Total OSB CCFS Total
Region GBPm GBPm GBPm % GBPm GBPm GBPm %
East Anglia 470.7 1,164.0 1,634.7 7 453.5 1,136.4 1,589.9 7
East Midlands 647.0 720.7 1,367.7 6 609.9 691.6 1,301.5 6
Greater London 5,895.4 3,313.7 9,209.1 37 5,559.3 3,293.0 8,852.3 38
Guernsey 19.6 - 19.6 - 21.5 - 21.5 -
Jersey 72.6 - 72.6 - 75.6 - 75.6 -
North East 186.8 279.0 465.8 2 169.8 274.5 444.3 2
North West 951.6 964.3 1,915.9 7 906.6 921.8 1,828.4 7
Northern Ireland 9.7 - 9.7 - 10.0 - 10.0 -
Scotland 32.5 276.8 309.3 1 36.9 261.3 298.2 1
South East 2,882.9 1,733.2 4,616.1 19 2,802.8 1,681.5 4,484.3 19
South West 939.5 699.4 1,638.9 7 893.7 659.6 1,553.3 7
Wales 315.2 301.6 616.8 3 297.5 284.7 582.2 2
West Midlands 966.3 792.6 1,758.9 7 908.9 761.3 1,670.2 7
Yorks and
Humberside 356.4 549.7 906.1 4 335.5 517.7 853.2 4
Total loans before
provisions 13,746.2 10,795.0 24,541.2 100 13,081.5 10,483.4 23,564.9 100
------------------- -------- -------- -------- --- -------- -------- -------- ---
1. Risk management (continued)
Approach to measurement of credit quality
The Group categorises the credit quality of loans and advances
to customers into internal risk grades based on the 12 month PD
calculated at the reporting date. The PDs include a combination of
internal behavioural and credit bureau characteristics and are
aligned with the Group's internal Capital models and Rating systems
to generate the risk grades which are then further grouped into the
following credit quality segments:
-- Excellent quality -- where there is a very high likelihood the asset will
be recovered in full with a negligible or very low risk of default.
-- Good quality -- where there is a high likelihood the asset will be
recovered in full with a low risk of default.
-- Satisfactory quality -- where the assets demonstrate a moderate default
risk.
-- Lower quality -- where the assets require closer monitoring and the risk
of default is of greater concern.
The following tables disclose the credit risk quality ratings of
loans and advances to customers by IFRS 9 stage. The assessment of
whether credit risk has increased significantly since initial
recognition is performed for each reporting period for the life of
the loan. Loans and advances to customers initially booked on very
low PDs and graded as excellent quality loans can experience an
SICR and therefore be moved to Stage 2. Such loans may still be
graded as excellent quality, if they meet the overall criteria.
As at 30-Jun-23 (Unaudited)
Stage
Stage Stage 3 PD lower PD upper
Stage 1 2 3 (POCI) Total range range
GBPm GBPm GBPm GBPm GBPm % %
OSB
Excellent 4,304.8 493.6 - - 4,798.4 - 0.3
Good 5,829.5 1,322.4 - - 7,151.9 0.3 2.0
Satisfactory 546.0 473.0 - - 1,019.0 2.0 7.4
Lower 40.2 495.4 - - 535.6 7.4 100.0
Impaired - - 408.3 - 408.3 100.0 100.0
POCI - - - 35.6 35.6 100.0 100.0
CCFS
Excellent 5,497.8 1,214.0 - - 6,711.8 - 0.3
Good 2,537.7 752.6 - - 3,290.3 0.3 2.0
Satisfactory 148.2 172.6 - - 320.8 2.0 7.4
Lower 5.5 252.3 - - 257.8 7.4 100.0
Impaired - - 173.8 - 173.8 100.0 100.0
POCI - - - 40.5 40.5 100.0 100.0
18,909.7 5,175.9 582.1 76.1 24,743.8
------------- -------- ------- ----- ------- -------- -------- --------
1. Risk management (continued)
As at 31-Dec-22 (Audited)
Stage
Stage Stage 3 PD lower PD upper
Stage 1 2 3 (POCI) Total range range
GBPm GBPm GBPm GBPm GBPm % %
OSB
Excellent 4,136.6 470.6 - - 4,607.2 - 0.3
Good 5,848.5 1,248.4 - - 7,096.9 0.3 2.0
Satisfactory 331.8 374.2 - - 706.0 2.0 7.4
Lower 29.9 416.5 - - 446.4 7.4 100.0
Impaired - - 349.7 - 349.7 100.0 100.0
POCI - - - 38.5 38.5 100.0 100.0
CCFS
Excellent 5,800.2 910.1 - - 6,710.3 - 0.3
Good 2,394.2 668.2 - - 3,062.4 0.3 2.0
Satisfactory 151.4 143.9 - - 295.3 2.0 7.4
Lower 29.7 185.2 - - 214.9 7.4 100.0
Impaired - - 156.0 - 156.0 100.0 100.0
POCI - - - 44.5 44.5 100.0 100.0
18,722.3 4,417.1 505.7 83.0 23,728.1
------------- -------- ------- ----- ------- -------- -------- --------
The tables below show the Group's other financial assets and
derivatives by credit risk rating grade. The credit grade is based
on the external credit rating of the counterparty; AAA to AA- are
rated Excellent; A+ to A- are rated Good; and BBB+ to BBB- are
rated Satisfactory.
As at 30-Jun-23 (Unaudited)
Excellent Good Satisfactory Total
GBPm GBPm GBPm GBPm
Investment securities 348.7 - - 348.7
Loans and advances to credit
institutions 3,227.3 381.6 8.1 3,617.0
Derivative assets 496.0 631.6 - 1,127.6
4,072.0 1,013.2 8.1 5,093.3
----------------------------- --------- ------- ------------ -------
As at 31-Dec-22 (Audited)
Excellent Good Satisfactory Total
GBPm GBPm GBPm GBPm
Investment securities 412.9 - - 412.9
Loans and advances to credit
institutions 2,923.2 435.4 7.1 3,365.7
Derivative assets 400.1 488.0 - 888.1
3,736.2 923.4 7.1 4,666.7
----------------------------- --------- ----- ------------ -------
1. Financial instruments and fair values
The following tables provide an analysis of financial assets and
financial liabilities measured at fair value in the Condensed
Consolidated Statement of Financial Position grouped into Levels 1
to 3 based on the degree to which the fair value is observable:
Carrying Principal Level Level Level
amount amount 1 2 3 Total
As at 30 June 2023
(Unaudited) GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Loans and advances to
credit institutions 10.5 10.2 - 10.5 - 10.5
Investment securities 10.2 10.4 9.8 - 0.4 10.2
Loans and advances to
customers 15.1 17.0 - - 15.1 15.1
Derivative assets 1,127.6 13,067.1 - 1,127.6 - 1,127.6
1,163.4 13,104.7 9.8 1,138.1 15.5 1,163.4
Financial liabilities
Derivative liabilities 88.6 8,936.0 - 88.6 - 88.6
Carrying Principal Level Level Level
amount amount 1 2 3 Total
As at 31 December 2022
(Audited) GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 150.3 150.5 149.8 - 0.5 150.3
Loans and advances to
customers 14.6 17.7 - - 14.6 14.6
Derivative assets 888.1 15,662.6 - 888.1 - 888.1
1,053.0 15,830.8 149.8 888.1 15.1 1,053.0
----------------------- -------
Financial liabilities
Derivative liabilities 106.6 9,518.0 - 106.6 - 106.6
Level 1: Fair values that are based entirely on quoted market
prices (unadjusted) in an actively traded market for identical
assets and liabilities that the Group has the ability to access.
Valuation adjustments and block discounts are not applied to Level
1 instruments. Since valuations are based on readily available
observable market prices, this makes them most reliable, reduces
the need for management judgement and estimation and also reduces
the uncertainty associated with determining fair values.
Level 2: Fair values that are based on one or more quoted prices
in markets that are not active or for which all significant inputs
are taken from directly or indirectly observable market data. These
include valuation models used to calculate the present value of
expected future cash flows and may be employed either when no
active market exists or when there are no quoted prices available
for similar instruments in active markets.
1. Financial instruments and fair values (continued)
Level 3: Fair values for which any one or more significant input
is not based on observable market data and the unobservable inputs
have a significant effect on the instrument's fair value. Valuation
models that employ significant unobservable inputs require a higher
degree of management judgement and estimation in determining the
fair value. Management judgement and estimation are usually
required for the selection of the appropriate valuation model to be
used, determination of expected future cash flows on the financial
instruments being valued, determination of the probability of
counterparty default and prepayments, determination of expected
volatilities and correlations and the selection of appropriate
discount rates.
The following tables provide an analysis of financial assets and
financial liabilities not measured at fair value in the Condensed
Consolidated Statement of Financial Position grouped into Levels 1
to 3 based on the degree to which the fair value is observable:
Estimated fair value
Carrying Principal Level Level Level
amount amount 1 2 3 Total
As at 30 June 2023
(Unaudited) GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.4 0.4 - 0.4 - 0.4
Loans and advances to
credit institutions 3,606.5 3,593.6 - 3,606.5 - 3,606.5
Investment securities 338.5 336.9 - 338.7 - 338.7
Loans and advances to
customers 24,571.7 24,808.6 - 2,090.7 21,645.2 23,735.9
Other assets(1) 2.3 2.3 - 2.3 - 2.3
28,519.4 28,741.8 - 6,038.6 21,645.2 27,683.8
----------------------- -------- --------- ----- -------- -------- --------
Financial liabilities
Amounts owed to retail
depositors 20,713.7 20,511.2 - 5,937.8 14,651.0 20,588.8
Amounts owed to credit
institutions 5,052.3 5,005.6 - 5,052.3 - 5,052.3
Amounts owed to other
customers 114.7 112.6 - - 114.7 114.7
Debt securities in
issue 457.5 456.0 - 457.5 - 457.5
Other liabilities(2) 34.1 34.1 - 34.1 - 34.1
Subordinated
liabilities 254.5 250.0 - 253.5 - 253.5
PSBs(3) 15.2 15.0 - 14.1 - 14.1
26,642.0 26,384.5 - 11,749.3 14,765.7 26,515.0
----------------------- -------- --------- ----- -------- -------- --------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
3. The Group has reviewed the trading frequency of the PSBs and determined
there is insufficient frequency and volume to provide pricing information
on an ongoing basis in the market and have therefore categorised as level
2 fair value (2022: level 1).
1. Financial instruments and fair values (continued)
Estimated fair value
Carrying Principal Level Level Level
amount amount 1 2 3 Total
As at 31 December 2022
(Audited) GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.4 0.4 - 0.4 - 0.4
Loans and advances to
credit institutions 3,365.7 3,360.9 - 3,365.7 - 3,365.7
Investment securities 262.6 262.1 - 260.5 - 260.5
Loans and advances to
customers 23,598.1 23,646.2 - 2,515.0 20,231.0 22,746.0
Other assets(1) 1.8 1.8 - 1.8 - 1.8
27,228.6 27,271.4 - 6,143.4 20,231.0 26,374.4
----------------------- -------- --------- ----- -------- -------- --------
Financial liabilities
Amounts owed to retail
depositors 19,755.8 19,620.8 - 5,770.3 13,922.7 19,693.0
Amounts owed to credit
institutions 5,092.9 5,057.8 - 5,092.9 - 5,092.9
Amounts owed to other
customers 113.1 112.1 - - 113.1 113.1
Debt securities in
issue 265.9 265.4 - 265.9 - 265.9
Other liabilities(2) 38.1 38.1 - 38.1 - 38.1
PSBs 15.2 15.0 14.0 - - 14.0
25,281.0 25,109.2 14.0 11,167.2 14,035.8 25,217.0
----------------------- -------- --------- ----- -------- -------- --------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
The valuation techniques for all the financial instruments are
consistent with those set out on pages 205 to 206 of the 2022
Annual Report and Financial Statements. For other assets and other
liabilities fair value is considered to be equal to carrying
value.
1. Operating segments
The Group segments its lending business and operates under two
segments in line with internal reporting to the Board:
-- OSB
-- CCFS
The Group separately discloses the impact of Combination
accounting but does not consider this a business segment.
The financial position and results of operations of the above
segments are summarised below:
OSB CCFS Combination Total
GBPm GBPm GBPm GBPm
Balances as at 30 June 2023
(Unaudited)
Gross loans and advances to
customers 13,948.8 10,772.0 38.1 24,758.9
Expected credit losses (139.6) (33.7) 1.2 (172.1)
Loans and advances to customers 13,809.2 10,738.3 39.3 24,586.8
Capital expenditure 13.2 0.1 - 13.3
Depreciation and amortisation 3.4 1.7 1.0 6.1
Profit for six months ended 30
June 2023 (Unaudited)
Net interest income/(expense) 241.1 39.2 (42.8) 237.5
Other (expenses)/income (9.9) 0.5 4.0 (5.4)
Total income/(expense) 231.2 39.7 (38.8) 232.1
Impairment of financial assets (39.2) (5.3) (0.1) (44.6)
Contribution to profit 192.0 34.4 (38.9) 187.5
Administrative expenses (72.0) (37.2) (1.0) (110.2)
Provisions (0.6) - - (0.6)
Profit/(loss) before taxation 119.4 (2.8) (39.9) 76.7
Taxation(1) (30.2) 1.5 11.3 (17.4)
Profit/(loss) for the period 89.2 (1.3) (28.6) 59.3
-----------------------------------
1. The tax on Combination credit includes the release of deferred taxation
on CCFS Combination relating to the unwind of the deferred tax
liabilities recognised on the fair value adjustments of the CCFS assets
and liabilities at the acquisition date GBP11.3m.
1. Operating segments (continued)
OSB CCFS Combination Total
GBPm GBPm GBPm GBPm
Balances as at 31 December 2022
(Audited)
Gross loans and advances to
customers 13,244.7 10,416.3 81.7 23,742.7
Expected credit losses (103.2) (28.0) 1.2 (130.0)
Loans and advances to customers 13,141.5 10,388.3 82.9 23,612.7
Capital expenditure 7.6 0.7 - 8.3
Depreciation and amortisation 6.2 3.4 3.8 13.4
Profit for six months ended 30
June 2022 (Unaudited)
Net interest income/(expense) 218.6 150.6 (25.8) 343.4
Other income 4.1 10.7 5.3 20.1
Total income/(expense) 222.7 161.3 (20.5) 363.5
Impairment of financial assets (1.9) (0.1) 0.4 (1.6)
Contribution to profit 220.8 161.2 (20.1) 361.9
Administrative expenses (54.8) (34.3) (2.2) (91.3)
Provisions 1.2 - - 1.2
Integration costs (3.1) (0.6) - (3.7)
Profit/(loss) before taxation 164.1 126.3 (22.3) 268.1
Taxation(1) (37.6) (32.3) 10.7 (59.2)
Profit/(loss) for the period 126.5 94.0 (11.6) 208.9
----------------------------------- -------- -----------
1. The tax on Combination credit includes the release of deferred taxation
on CCFS Combination relating to the unwind of the deferred tax
liabilities recognised on the fair value adjustments of the CCFS assets
and liabilities at the acquisition date of GBP6.0m and the impact of the
bank surcharge decrease on these deferred tax liabilities of GBP4.7m.
1. Adjustments for non-cash items and changes in operating assets and
liabilities
Six months Six months
ended ended
30-Jun-23 30-Jun-22
(Unaudited)
(Unaudited) (Restated)(1)
GBPm GBPm
Adjustments for non-cash items:
Depreciation and amortisation 6.1 7.0
Interest on investment securities (9.9) (1.7)
Interest on subordinated liabilities 4.5 0.4
Interest on PSBs 0.3 0.3
Interest on securitised debt 6.1 2.9
Interest on financing debt 92.4 15.8
Impairment charge on loans 44.6 1.6
Administrative expenses 0.3 -
Provisions 0.6 (1.2)
Interest on lease liabilities 0.1 0.1
Fair value (losses)/gains on financial
instruments 8.1 (16.4)
Share-based payments 3.2 4.3
Total adjustments for non-cash items 156.4 13.1
------------------------------------------------- ----------- --------------
Changes in operating assets and liabilities:
Decrease/(increase) in loans and advances
to credit institutions 76.0 (53.3)
Increase in loans and advances to customers (1,017.5) (680.1)
Increase in intercompany balances 7.3 5.0
Increase in amounts owed to retail depositors 957.9 412.6
Increase in cash collateral and margin
received(1) 253.9 280.8
Net increase in other assets (1.6) (2.9)
Net (decrease)/increase in derivatives and
hedged items (14.8) 14.9
Net increase in amounts owed to other customers 1.6 26.0
Net decrease in other liabilities (4.2) (2.6)
Exchange differences on working capital (0.5) 0.1
Total changes in operating assets and
liabilities(1) 258.1 0.5
------------------------------------------------- ----------- --------------
1. 2022 figures restated see note 1 b) for further details.
1. Capital management
The Company reports on an individual consolidation basis (OSB
solo) which includes the Company and subsidiaries except for the
offshore servicing entity OSBI, SPVs relating to securitisations
and the CCFS entities acquired in October 2019.
The capital management position is based on the three 'pillars'
of Basel II.
The OSB solo Pillar 1 capital information is presented
below:
As at As at
30-Jun-23 31-Dec-22
(Unaudited) (Unaudited)
GBPm GBPm
Common Equity Tier 1 (CET1) capital
Called up share capital 4.5 4.5
Share premium, capital contribution and share-based
payment reserve 11.3 12.2
Retained earnings 1,701.7 1,826.0
Other reserves (1.8) (1.1)
Total equity attributable to ordinary shareholders 1,715.7 1,841.6
Foreseeable dividends(1) (43.1) (79.1)
IFRS 9 transitional adjustment(2) - 0.7
COVID-19 ECL transitional adjustment(3) 21.3 18.9
Solo consolidation adjustments (10.1) (13.6)
Deductions from Common Equity Tier 1 capital
Investment in subsidiary (542.5) (533.0)
Prudent valuation adjustment(4) (0.7) (0.3)
Intangible assets (13.6) (6.6)
Deferred tax asset (0.4) (0.6)
CET1 capital 1,126.6 1,228.0
---------------------------------------------------- ----------- -----------
AT1 capital
Additional Tier 1 Securities 90.0 90.0
Total Tier 1 capital 1,216.6 1,318.0
---------------------------------------------------- ----------- -----------
Tier 2 capital
Subordinated debt and PSBs 165.0 15.0
Total Tier 2 capital 165.0 15.0
---------------------------------------------------- ----------- -----------
Total regulatory capital 1,381.6 1,333.0
Risk-weighted assets (unaudited) 7,160.8 6,660.5
1. 2023 dividend is set at a level to fund the OSB Group plc dividend.
2. The IFRS 9 transitional arrangements ended in 2022. In 2022, this
represented 25.0% remaining of the IFRS 9 transitional adjustment.
3. The COVID-19 ECL transitional adjustment relates to 50% of OSB solo's
increase in stage 1 and stage 2 ECL following the impacts of COVID-19 and
for which transitional rules are being adopted for regulatory capital
purposes.
4. OSB solo has adopted the simplified approach under the Prudent Valuation
rules, recognising a deduction equal to 0.1% of fair value assets and
liabilities after adjusting for hedge accounting.
32. Related Parties
The Group had no related party transactions during the six
months to 30 June 2023 that materially affected the position or
performance of the Group.
Transactions with key management personnel
During the period, OSB GROUP PLC granted 185,887 (2022: 282,447)
awards under the Deferred Share Bonus Plan and 899,850 (2022:
737,825) awards under the Performance Share Plan to 11 (2022: 11)
key management personnel. The awards were granted on 22 March 2023
with a grant price of GBP4.9787. Details of these plans can be
found in note 11 of the 2022 Annual Report and Financial Statements
on pages 123 to 126.
1. Events after the reporting date
There have been no material events after the reporting date.
OneSavings Bank plc
Interim report for the six months ended 30 June 2023
Appendix
Key performance indicators
Underlying results for the six months to 30 June 2023 and 30
June 2022 exclude integration costs and other acquisition-related
items. The underlying results provide a more consistent basis for
comparing the Group's performance between financial periods.
Net interest margin (NIM)
For the period of six months NIM is calculated as net interest
income annualised on an actual days basis, as a percentage of a 7
point average(1) of interest earning assets (cash, investment
securities, loans and advances to customers and credit
institutions). It represents the margin earned on loans and
advances and liquid assets after swap expense/income and cost of
funds.
HY 2023 HY 2022
GBPm GBPm
Net interest income -- statutory 237.5 343.4
Add back: acquisition-related items(2) 42.8 25.8
Net interest income -- underlying 280.3 369.2
Net interest income annualised on an actual days
basis:
Net interest income -- statutory A 478.9 692.5
Net interest income -- underlying B 565.2 744.5
7 point average of interest earning assets --
statutory C 27,926.6 24,743.0
7 point average of interest earning assets --
underlying D 27,857.6 24,613.5
NIM statutory equals A/C 171bps 280bps
NIM underlying equals B/D 203bps 302bps
Cost to income ratio
The cost to income ratio is defined as administrative expenses
as a percentage of total income. It is a measure of operational
efficiency.
HY 2023 HY 2022
GBPm GBPm
Administrative expenses -- statutory A 110.2 91.3
Add back: acquisition-related items(2) (1.0) (2.2)
Administrative expenses -- underlying B 109.2 89.1
Total income -- statutory C 232.1 363.5
Add back: acquisition-related items(2) 38.8 20.5
Total income underlying D 270.9 384.0
Cost to income statutory equals A/C 47% 25%
Cost to income underlying equals B/D
40% 23%
Management expense ratio
For the period of six months the management expense ratio is
defined as administrative expenses annualised on a simple basis as
a percentage of a 7 point average(1) of total assets.
HY 2023 HY 2022
GBPm GBPm
Administrative expenses -- statutory (as in cost
to income ratio above) A 110.2 91.3
Administrative expenses -- underlying (as in cost
to income ratio above) B 109.2 89.1
7 point average of total assets -- statutory C 28,122.7 24,857.7
7 point average of total assets -- underlying 28,058.6 24,742.1
D 78bps 73bps
Management expense ratio statutory equals A/C 78bps 72bps
on an annualised basis
Management expense ratio underlying equals B/D
on an annualised basis
Loan loss ratio
For the period of six months, the loan loss ratio is defined as
impairment losses annualised on a simple basis as a percentage of a
7 point average(1) of gross loans and advances. It is a measure of
the credit performance of the loan book.
HY 2023 HY 2022
GBPm GBPm
Impairment losses -- statutory A 44.6 1.6
Add back: acquisition-related items(2) (0.1) 0.4
Impairment losses -- underlying B 44.5 2.0
7 point average of gross loans -- statutory C 24,325.7 21,487.1
7 point average of gross loans -- underlying 24,259.7 21,356.0
D 37bps 1bp
Loan loss ratio statutory equals A/C on an annualised 37bps 2bps
basis
Loan loss ratio underlying equals B/D on an annualised
basis
Return on equity (RoE)
RoE is defined as profit attributable to ordinary shareholders,
which is profit after tax and after deducting coupons on AT1
securities, annualised on a simple basis, as a percentage of a 7
point average(1) of shareholders' equity (excluding GBP150m of AT1
securities).
HY 2023 HY 2022
GBPm GBPm
Profit after tax - statutory 59.3 208.9
Coupons on AT1 securities (4.5) (4.5)
Profit attributable to ordinary shareholders
-- statutory A 54.8 204.4
Add back: acquisition related items(2) 28.6 14.4
--------------------------------------------- ------- -------
Profit attributable to ordinary shareholders
-- underlying B 83.4 218.8
7 point average of shareholders' equity (excluding AT1
securities) -- statutory C
2,080.9 1,933.5
7 point average of shareholders' equity (excluding AT1
securities) -- underlying D
2,057.5 1,851.3
Return on equity statutory equals A/C on an annualised basis
5% 21%
Return on equity underlying equals B/D on an annualised
basis
8% 24%
OneSavings Bank plc
Interim Report for the six months ended 30 June 2023
Company information
Registered office
Reliance House
Sun Pier
Chatham
Kent, ME4 4ET
Registered in England, company number: 07312896
Internet
https://www.globenewswire.com/Tracker?data=CxTrtUWxVePlyzIKsWqI6lKIsgutEZmCluymPVtjU35MqhS00KP-hai--KymVefCJ8f1mqnDH3RChyI-_QH_wQ==
www.osb.co.uk
Auditor
Deloitte LLP
1 New Street Square
London
EC4A 3HQ
Media and Public Relations
Brunswick Group LLP
16 Lincoln's Inn Fields
London, WC2A 3ED
(END) Dow Jones Newswires
August 11, 2023 02:00 ET (06:00 GMT)
Copyright (c) 2023 Dow Jones & Company, Inc.
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